Putting Your Money Where Your Mouth Is: The Performance of Earnouts in Merger AgreementsCenter for Law, Economics, and Finance Junior Scholars Workshop (2011)
AbstractThis Article extends the existing literature on contingent earnout provisions in merger agreements by examining the actual performance of such provisions and drawing conclusions about their adequacy as contractual responses to asymmetric information. The data recently made available suggests that actual target company performance post-closing often falls short of the expectations of both buyers and sellers – even when those expectations have already been discounted for risk. Although the earnout mechanism appears to insure against the risk of overpayment for low quality targets, the consistent failure of sellers to meet earnout targets suggests that the earnout provision may be an inadequate response to the dual problems of adverse selection and moral hazard. These results suggest that these provisions may not have utility ascribed to them by academics studying transactional law.
Publication DateApril 2, 2011
Citation InformationBrian JM Quinn. "Putting Your Money Where Your Mouth Is: The Performance of Earnouts in Merger Agreements" Center for Law, Economics, and Finance Junior Scholars Workshop (2011)
Available at: http://works.bepress.com/brian_quinn/29/