The Impact of Earnouts in M&A Agreement: An Overview of Empirical Findings

Abstract

From a theoretical perspective, the use of earnouts should mitigate valuation risk of the acquirer involved in mergers and acquisitions (M&A) transaction. Earnouts contracts should reduce information asymmetries and moral hazard issues. By contrast, the definition of the terms of such contracts can be difficult and they provide several implementation issues to be faced. Based on these premises, this study aims to examine if the inclusion of earnouts is convenient and who benefits from their use. To this aim, I scrutinize academic literature examining the impact of earnouts. I perform a systematic review of studies in both accounting and financial domains that provide empirical evidence of main consequences due to the use of earnouts in M&A. Findings generally highlight a positive impact on the stock market performance of the acquirer in earnout-financed deals. Nevertheless, the positive reaction of acquirers’ investors is influenced by specific features to be managed. Several issues are still uncovered and need further examination.