Contingent earnouts in acquisitions of privately held targets

J Reuer, R Ragozzino

Research output: Contribution to journalArticleAcademicpeer-review

41 Citations (Scopus)

Abstract

Prior research has devoted significant attention to ownership choices when firms make marketentry decisions (e.g., equity alliance versus acquisition). This article emphasizes the importance of studying firms¿ contractual choices as well as the potential relationships between their contractual and ownership choices. This study of acquisitions examines the incidence and determinants of contingent earnouts, which are contracts that specify deferred variable payments to the target. The evidence indicates that the usage of such contracts increases with information asymmetries surrounding mergers and acquisitions, in particular when privately held targets are young or possess knowledge bases that are dissimilar from those of the acquirers. The article also presents evidence that firms¿ contractual choices (i.e., earnouts) and ownership choices (i.e., equity alliances) can substitute for one another.
Original languageEnglish
Pages (from-to)857-879
Number of pages23
JournalJournal of Management
Volume35
Issue number4
DOIs
Publication statusPublished - 2009

Research programs

  • RSM S&E

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