CBPA Dean's Research Seminar - Dr. Leonidas Baropoulos
- 03/21/2014 12:00 PM - 03/21/2014 1:30 AM
- Constant Hall - 2003
- Title: Shareholder Value Gains from Earnout in Corporate Acquisitions: Cross-border versus Domestic Deals
Abstract: The paper examines the gains to acquirers when the deal value is contingent upon post-merger performance (i.e. earnout considerations). Earnout considerations are posited as devices to mitigate the adverse selection and moral hazard problems in corporate acquisitions more effectively than full payments at the time of the deal. Our analysis uncovers several important and distinct results. First, the use of earnout adds additional value to acquirers. Second, the initial payment method used in earnout deals is an important determinant of the distribution of acquirers' returns. Third, a comparative analysis of gains using the propensity score matching method, augmented with the Rosenbaum-bounds that addresses sample selection bias, confirms that earnout financed deals outperform non-earnout deals. Fourth, a logistic model is constructed to estimate the 'correct' use of earnout in acquisitions. The results show that foreign deals financed with the 'correct' use of earnout persistently outperform domestic acquisitions. Finally, the findings suggest that the 'correct' use of earnout combined with an appropriate initial payment method provides an effective mechanism for mitigating the risks of adverse selection and moral hazard in corporate acquisitions, in particular, cross-border acquisitions thereby generating significantly more value for acquirer shareholders.