Publicação
The role of earnouts in mergers and acquisitions
| Resumo: | This thesis examines the multifaceted role of earnouts in mergers and acquisitions, focusing on their implications for earnings management, executive incentives, deal outcomes, and managerial responsiveness to market feedback. In the first chapter, we investigate whether acquiring firms manipulate earnings during the earnout period to reduce contingent payments to target shareholders. The analysis of completed U.S. deals between 1998 and 2017 reveals systematic downward earnings management, primarily through real activities, particularly in cash-based earnout structures. The second chapter explores how CEO compensation design influences the likelihood of using earnouts in acquisitions. Drawing on a sample of controlling deals from 1998 to 2022, we find that higher pay-performance sensitivity (delta) and risk-taking incentives (vega) are negatively associated with using earnouts, especially in transactions involving private and intangible-intensive targets. In the third chapter, we analyze the effects of earnouts on deal completion, time to closing, and managerial learning from market signals. Using a large dataset of over 19,000 M&A deals, the findings confirm that earnouts enhance completion rates and speed. However, they also reveal that their use is associated with reduced managerial responsiveness to adverse market reactions. Managers are more likely to proceed with poorly received deals and show limited willingness to renegotiate or drop earnouts when conditions change. Collectively, these findings highlight both the contractual benefits and behavioral limitations of earnouts, offering new insights into how contingent payments interact with managerial incentives, governance mechanisms, and market discipline. The thesis contributes to the literature on M&A deal design, incentive alignment, and managerial learning and underscores the importance of monitoring earnout use to safeguard shareholder interests. |
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| Autores principais: | Coelho, António Pedro Almeida Antunes |
| Assunto: | Mergers and Acquisitions (M&A) Earnouts Deal completion Earnings management CEO compensation Managerial learning Contract design Market feedback Corporate governance Contingent payments Fusões e Aquisições (F&A) Concretização de negócios Manipulação de resultados Remuneração dos CEOs Aprendizagem dos gestores Design de contratos de F&A Reação do mercado Governação empresarial Pagamentos contingentes Ciências Sociais::Economia e Gestão |
| Ano: | 2025 |
| País: | Portugal |
| Tipo de documento: | tese de doutoramento |
| Tipo de acesso: | acesso aberto |
| Instituição associada: | Universidade do Minho |
| Idioma: | inglês |
| Origem: | RepositóriUM - Universidade do Minho |
| Resumo: | This thesis examines the multifaceted role of earnouts in mergers and acquisitions, focusing on their implications for earnings management, executive incentives, deal outcomes, and managerial responsiveness to market feedback. In the first chapter, we investigate whether acquiring firms manipulate earnings during the earnout period to reduce contingent payments to target shareholders. The analysis of completed U.S. deals between 1998 and 2017 reveals systematic downward earnings management, primarily through real activities, particularly in cash-based earnout structures. The second chapter explores how CEO compensation design influences the likelihood of using earnouts in acquisitions. Drawing on a sample of controlling deals from 1998 to 2022, we find that higher pay-performance sensitivity (delta) and risk-taking incentives (vega) are negatively associated with using earnouts, especially in transactions involving private and intangible-intensive targets. In the third chapter, we analyze the effects of earnouts on deal completion, time to closing, and managerial learning from market signals. Using a large dataset of over 19,000 M&A deals, the findings confirm that earnouts enhance completion rates and speed. However, they also reveal that their use is associated with reduced managerial responsiveness to adverse market reactions. Managers are more likely to proceed with poorly received deals and show limited willingness to renegotiate or drop earnouts when conditions change. Collectively, these findings highlight both the contractual benefits and behavioral limitations of earnouts, offering new insights into how contingent payments interact with managerial incentives, governance mechanisms, and market discipline. The thesis contributes to the literature on M&A deal design, incentive alignment, and managerial learning and underscores the importance of monitoring earnout use to safeguard shareholder interests. |
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