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Earnout deals are expected to protect acquirers from overpayment as information asymmetries are reduced and the final purchase price is partly based on the future performance of the target. Various scholars have investigated the perception of earnout deals by capital markets revealing significant abnormal returns. Those studies are focused mostly on the Anglo-Saxon countries and China leveraging a pre-COVID datasets. Hence, this study aims at investigating capital market reaction to earnout deals in Continental Europe covering the timeline of 2012 to 2022. Our results indicate that earnout deals in Continental Europe outperform non-earnout deals and are especially beneficial in times of high uncertainty.
The new bond on the block
(2024)
Over the last decade, the green bond market experienced strong growth rates fueled by the need to combat climate change. However, the discourse on enhancing the effectiveness of green bonds primarily revolves around regulatory measures, often overlooking the possibility of designing inherent incentives. We show that a green bond with a coupon structure positively related to the carbon price development stimulates (early) investment in an emission-reducing project and creates higher net present values (NPVs) when applied in project financing. In our simulation-based framework, we model carbon prices using a geometric Brownian motion, and create a general optimal stopping time problem regarding the start of the project. The green bond in our setting carries the risk of default, also mitigated by its carbon price-linked coupon structure.
Defining the deal value in mergers and acquisitions is inherently complex and often constitutes an inflection point for the parties involved. By paying part of the deal value at a later stage according to predefined goals, earnouts are intended to alleviate information asymmetries and help bridge valuation differences. Despite their wide application in practice, research on earnouts remains fragmented. This study presents the first systematic literature review of earnouts, mapping the scattered research landscape by analyzing 64 papers published between 1970 and 2023. The review categorizes the body of earnout research into three distinct streams: the motives for employing earnouts, their implications, and the nuances of their contractual arrangements. Based on this synthesis, research gaps are identified that present a comprehensive road map for future research. This study enables investors to employ earnouts more successfully and guides scholars to pursue further earnout research based on its holistic overview.
Panacea for M&A dealmaking?
(2023)
We survey 129 investors from private equity firms, investment banks, corporate M&A and other M&A-related roles about their perception of earnouts. The results indicate that earnouts are applied to reduce information asymmetries and to bridge negative agreement zones in transactions. While these findings are largely aligned with the academic perspectives, we reveal several discrepancies to existing theory with respect to motives, valuation and associated costs. This is the first study that incorporates the view of M&A professionals and thus attempts to bridge the gap between academics and professionals. In addition, it provides impulses for further academic work on earnouts.