Trading Activity and Liquidity Effects Around Private Firm Acquisition Announcements: The Case of Earnouts Versus Other Methods of Payment

42 Pages Posted: 24 Jan 2018

See all articles by Eleonora Monaco

Eleonora Monaco

Catolica Porto Business School,Universidade Catolica Portuguesa; European Capital Markets CRC

Gbenga Ibikunle

University of Edinburgh; European Capital Markets Cooperative Research Centre

Riccardo Palumbo

University of Chieti-Pescara; European Capital Markets CRC

Date Written: January 3, 2018

Abstract

We investigate trading activity and liquidity effects of methods of payment on the stock prices of acquiring firms around private firm acquisition announcements. We find significant rises in trading activity around acquisition announcement dates irrespective of the payment method used; however, fluctuations are lower for earnouts and cash payment options. Stocks of acquirers using earnouts also benefit from enhanced post-announcement liquidity. These effects of earnouts are linked to acquirers’ lower risk of being adversely selected when acquiring private firms, given that information asymmetry is inherently lower when using a staggered payment term linked to performance than otherwise.

Keywords: earnout, method of payment, information asymmetry, liquidity, acquisition announcements

JEL Classification: G14, G34

Suggested Citation

Monaco, Eleonora and Ibikunle, Gbenga and Palumbo, Riccardo, Trading Activity and Liquidity Effects Around Private Firm Acquisition Announcements: The Case of Earnouts Versus Other Methods of Payment (January 3, 2018). Available at SSRN: https://ssrn.com/abstract=3103432 or http://dx.doi.org/10.2139/ssrn.3103432

Eleonora Monaco (Contact Author)

Catolica Porto Business School,Universidade Catolica Portuguesa; European Capital Markets CRC ( email )

Porto, Porto 4169-005
Portugal

Gbenga Ibikunle

University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

European Capital Markets Cooperative Research Centre ( email )

Viale Pidaro 42
Pescara, 65121
Italy

Riccardo Palumbo

University of Chieti-Pescara ( email )

Via Luigi Polacchi 11
Chieti, Chieti 66100
Italy

HOME PAGE: http://www.unich.it

European Capital Markets CRC ( email )

Via Luigi Polacchi 11
Chieti, Chieti 66100
Italy

HOME PAGE: http://www.ecmcrc.org

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
62
Abstract Views
1,040
rank
424,992
PlumX Metrics