Earnout financing in the financial services industry
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This paper explores the effects of earnout contracts used in US financial services M&A. We use propensity score matching (PSM) to address selection bias issues with regard to the endogeneity of the decision of financial institutions to use such contracts. We find that the use of earnout contracts leads to significantly higher acquirer abnormal (short- and long-run) returns compared to counterpart acquisitions (control deals) which do not use such contracts. The larger the size of the deferred (earnout) payment, as a fraction of the total transaction value, the higher the acquirers’ gains in the short- and long-run. Both acquirer short- and long-run gains increase when the management team of the target institution is retained in the post-acquisition period.
Barbopoulos , L G , Molyneux , P & Wilson , J O S 2016 , ' Earnout financing in the financial services industry ' , International Review of Financial Analysis , vol. 47 , pp. 119-132 . https://doi.org/10.1016/j.irfa.2016.07.001
International Review of Financial Analysis
© 2016 Elsevier Inc. All rights reserved. This work is made available online in accordance with the publisher’s policies. This is the author created, accepted version manuscript following peer review and may differ slightly from the final published version. The final published version of this work is available at https://dx.doi.org/10.1016/j.irfa.2016.07.001
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