Earnout Provisions and Acquirer Announcement Returns in Mergers and Acquisitions

Sammanfattning

Earnout provisions are increasingly used in mergers and acquisitions (M&A) asa payment structure where part of the acquisition price depends on the target’spost-acquisition performance. By reducing information asymmetry and aligning incentives between acquirer and target, earnouts are expected to generate favorablemarket reactions at the time of announcement. This thesis contributes to the M&Aliterature by examining whether earnout provisions influence cumulative abnormalreturns (CARs) for publicly listed acquirers across a large cross-regional sample. Theanalysis applies event-study methodology and multivariate regression models to asample of 55,281 transactions announced by acquirers in Europe, Canada, and theUnited States between 2002 and 2024. The univariate analysis shows that earnouttransactions are associated with a higher mean CAR[-1,+1] than non-earnout transactions (1.29% vs. 0.91%). However, this difference becomes statistically insignificant once deal- and firm characteristics are accounted for. Interaction terms betweenearnout and cross-border status, deal value, and the acquirer’s market-to-book ratioare statistically insignificant, a conclusion that holds when broader event windowsare applied. The findings suggest that the higher returns observed in earnout transactions reflect differences in deal- and firm characteristics rather than the earnoutstructure itself.