Earnouts in mergers: Agreeing to disagree and agreeing to stay

Authors
Citation
N. Kohers et J. Ang, Earnouts in mergers: Agreeing to disagree and agreeing to stay, J BUS, 73(3), 2000, pp. 445-476
Citations number
23
Categorie Soggetti
Economics
Journal title
JOURNAL OF BUSINESS
ISSN journal
00219398 → ACNP
Volume
73
Issue
3
Year of publication
2000
Pages
445 - 476
Database
ISI
SICI code
0021-9398(200007)73:3<445:EIMATD>2.0.ZU;2-W
Abstract
We examine a large sample of mergers involving earnout payments made by bid ders to target shareholders. Our findings suggest that earnouts serve two n ot mutually exclusive functions: as risk reduction mechanisms against misva luation of high asymmetric information targets, and as retention bonuses fo r target human capital in mergers with feasible contract implementation. Ar ound the merger announcement, bidder shareholders show significant positive responses, which are not reversed over the subsequent 3 years. In the post merger period, the frequency of earnout payment and the percentage of targe t managers staying beyond the earnout period are high, supporting the use o f earnouts as retention bonuses.