{"title":"Should I Trust You? Bidder’s Earnings Quality as an Indicator of Trustworthiness in Earnout Agreements","authors":"A. Prencipe, Luca Viarengo","doi":"10.1142/s1094406022500020","DOIUrl":null,"url":null,"abstract":"The research problem This paper aims to test whether an acquirer’s past earnings quality (proxied by the level of earnings management) serves as an indicator of its trustworthiness in view of the inclusion of an earnout agreement in an acquisition contract. Motivation Prior studies highlighted the benefits of earnout agreements, showing that they help reduce adverse selection problems and valuation risk faced by the acquirers. However, not much attention has been paid to the risks that these contracts entail. The majority of earnouts are based on accounting performance measures, which may be subject to earnings management by the acquirer to reduce, or even avoid, contingent payments. Therefore, the decision to include an earnout in an acquisition may depend on the sellers’ perceived probability that the acquirer will use opportunistic tactics to avoid the contingent payment, as indicated by the acquirer’s past behavior. The test hypotheses Hypothesis 1: The likelihood of inclusion of earnouts in acquisition deals is negatively associated with the level of earnings management in the acquirer’s past financial statements. Hypothesis 2: The relation between earnings management and the use of earnouts is stronger when the bidder has no acquisition track record. Target population M&A advisors, financial analysts, stakeholders of companies engaging in M&A deals. Adopted methodology Logit regressions, propensity score matching analyses for robustness. Analyses Using a sample of 8,968 acquisition deals completed by US listed companies between 2002 and 2014, we examine the association between the use of earnouts and bidder’s earnings quality (proxied by the level of earnings management) controlling for the determinants of the use of earnouts described by previous literature. We collected acquisitions data from Thomson ONE Banker and accounting information from Compustat. Using logit models, we regress the choice to include an earnout in an M&A deal on several earnings management proxies and on the interaction between the latter variables and bidder’s acquisition track record. Findings We find robust evidence that the level of the acquirer’s past earnings management is negatively associated to the probability of inclusion of an earnout in acquisition contracts. This association is stronger if the bidder has no prior acquisition history and is robust to various measures of earnings management and to controls for other external monitoring mechanisms.","PeriodicalId":47122,"journal":{"name":"International Journal of Accounting","volume":null,"pages":null},"PeriodicalIF":2.0000,"publicationDate":"2022-02-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"2","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"International Journal of Accounting","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.1142/s1094406022500020","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q2","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 2
Abstract
The research problem This paper aims to test whether an acquirer’s past earnings quality (proxied by the level of earnings management) serves as an indicator of its trustworthiness in view of the inclusion of an earnout agreement in an acquisition contract. Motivation Prior studies highlighted the benefits of earnout agreements, showing that they help reduce adverse selection problems and valuation risk faced by the acquirers. However, not much attention has been paid to the risks that these contracts entail. The majority of earnouts are based on accounting performance measures, which may be subject to earnings management by the acquirer to reduce, or even avoid, contingent payments. Therefore, the decision to include an earnout in an acquisition may depend on the sellers’ perceived probability that the acquirer will use opportunistic tactics to avoid the contingent payment, as indicated by the acquirer’s past behavior. The test hypotheses Hypothesis 1: The likelihood of inclusion of earnouts in acquisition deals is negatively associated with the level of earnings management in the acquirer’s past financial statements. Hypothesis 2: The relation between earnings management and the use of earnouts is stronger when the bidder has no acquisition track record. Target population M&A advisors, financial analysts, stakeholders of companies engaging in M&A deals. Adopted methodology Logit regressions, propensity score matching analyses for robustness. Analyses Using a sample of 8,968 acquisition deals completed by US listed companies between 2002 and 2014, we examine the association between the use of earnouts and bidder’s earnings quality (proxied by the level of earnings management) controlling for the determinants of the use of earnouts described by previous literature. We collected acquisitions data from Thomson ONE Banker and accounting information from Compustat. Using logit models, we regress the choice to include an earnout in an M&A deal on several earnings management proxies and on the interaction between the latter variables and bidder’s acquisition track record. Findings We find robust evidence that the level of the acquirer’s past earnings management is negatively associated to the probability of inclusion of an earnout in acquisition contracts. This association is stronger if the bidder has no prior acquisition history and is robust to various measures of earnings management and to controls for other external monitoring mechanisms.
本文旨在检验在收购合同中包含盈利能力协议的情况下,收购方过去的盈余质量(以盈余管理水平为代理)是否可以作为其可信度的指标。先前的研究强调了盈利协议的好处,表明它们有助于减少收购方面临的逆向选择问题和估值风险。然而,人们对这些合同所带来的风险并没有给予太多关注。大多数收益是基于会计业绩衡量标准的,这些指标可能受制于收购方的盈余管理,以减少甚至避免或有支付。因此,在收购中纳入获利的决定可能取决于卖方感知到的可能性,即收购方将使用机会主义策略来避免或有支付,这一点由收购方过去的行为表明。假设1:收购交易中包含盈利的可能性与收购方过去财务报表中的盈余管理水平呈负相关。假设2:当投标人没有收购记录时,盈余管理与盈余使用之间的关系更强。目标人群:并购顾问、金融分析师、参与并购交易的公司的利益相关者。采用Logit回归方法,倾向评分匹配分析稳健性。利用2002年至2014年间美国上市公司完成的8,968笔收购交易的样本,我们检验了盈余使用与投标人盈余质量(以盈余管理水平为代表)之间的关联,控制了先前文献中描述的盈余使用的决定因素。我们从Thomson ONE Banker收集了收购数据,从Compustat收集了会计信息。使用logit模型,我们对并购交易中包含盈利的选择进行了回归,包括几个盈余管理代理以及后一个变量与投标人收购记录之间的相互作用。我们发现强有力的证据表明,收购方过去盈余管理水平与收购合同中包含盈利的可能性呈负相关。如果竞标者之前没有收购历史,并且对各种盈余管理措施和其他外部监控机制的控制都很稳健,那么这种联系就会更强。
期刊介绍:
The aim of The International Journal of Accounting is to advance the academic and professional understanding of accounting theory, policies and practice from the international perspective and viewpoint. The Journal editorial recognizes that international accounting is influenced by a variety of forces, e.g., governmental, political and economic. Thus, the primary criterion for manuscript evaluation is the incremental contribution to international accounting literature and the forces that impact the field. The Journal aims at understanding the present and potential ability of accounting to aid in analyzing and interpreting international economic transactions and the economic consequences of such reporting. These transactions may be within a profit or non-profit environment. The Journal encourages a broad view of the origins and development of accounting with an emphasis on its functions in an increasingly interdependent global economy. The Journal also welcomes manuscripts that help explain current international accounting practices, with related theoretical justifications, and identify criticisms of current policies and practice. Other than occasional commissioned papers or special issues, all the manuscripts published in the Journal are selected by the editors after the normal double-blind refereeing process.