Earnout Financing in the Financial Services Industry

Posted: 16 Mar 2021

See all articles by Leonidas G. Barbopoulos

Leonidas G. Barbopoulos

University of Edinburgh

Philip Molyneux

University of Sharjah - College of Business Administration

John O. S. Wilson

University of St. Andrews

Date Written: 2016

Abstract

This paper explores the effects of earnout contracts used in US financial services M&A. We use propensity score matching (PSM) to address selection bias issues with regard to the endogeneity of the decision of financial institutions to use such contracts. We find that the use of earnout contracts leads to significantly higher acquirer abnormal returns (short- and long-run) compared to counterpart acquisitions (control deals) which do not use such contracts. The larger the size of the deferred (earnout) payment, as a fraction of the total transaction value, the higher the acquirers' gains in the short- and long-run. Both acquirer short- and long-run gains increase when the management team of the target institution is retained in the post-acquisition period.

Keywords: Earnouts, Acquisitions of financial institutions, Propensity score matching, Rosenbaum-bounds

JEL Classification: G34

Suggested Citation

Barbopoulos, Leonidas G. and Molyneux, Philip and Wilson, John O. S., Earnout Financing in the Financial Services Industry (2016). International Review of Financial Analysis, Vol. 47, 2016, Available at SSRN: https://ssrn.com/abstract=3797076

Leonidas G. Barbopoulos (Contact Author)

University of Edinburgh ( email )

University of Edinburgh Business School
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
United Kingdom

Philip Molyneux

University of Sharjah - College of Business Administration ( email )

University City Road
Sharjah, 27272
United Arab Emirates

John O. S. Wilson

University of St. Andrews ( email )

North St
Saint Andrews, Fife KY16 9AJ
United Kingdom

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