Determinants of Earnout as Acquisition Payment Currency and Bidder's Value Gains
Posted: 16 Mar 2021
Date Written: 2012
We examine the wealth effects of a comprehensive sample of UK bidders offering contingent payment, or earnout, as consideration for their acquisitions. We show that bidders using earnout generate signifi- cantly higher announcement and post-acquisition value gains than bidders using non-earnout currencies (such as cash, stock exchange, or mixed payments). We construct a logistic model to predict when it is optimal for a bidder to offer earnout. We show that bidders offering earnout optimally enjoy significantly higher announcement and post-acquisition gains than bidders offering non-earnout currencies, consis- tent with our model of the choice of the optimal method of payment. Overall, we provide robust evidence that earnout is an effective payment mechanism to mitigate valuation risk to acquirers, and also enhances acquirer value during the announcement and post-acquisition periods. Our paper contributes to the broader literature on how corporate acquirers use payment currency to manage information asym- metry and the attendant valuation risk.
Keywords: Earnout, Acquisition performance, Method of payment, Information asymmetry, Valuation risk
JEL Classification: G34
Suggested Citation: Suggested Citation