Abstract
This paper examines the relationship of the contractual terms in an earnout agreement, specifically earnout size, length of earnout period, and inter-industry acquisition, to the actual postmerger earnout payment. The researcher hypothesized that larger earnout size, shorter earnout period, and same-industry takeover would most likely lead to a full or positive earnout payment. A sample of 4,790 mergers and acquisitions with earnout provisions were examined. Descriptive analysis, Cluster analysis, Correlation analysis, and Probit analysis were employed to test the aforementioned premises. Results suggested that earnout size and earnout period are significantly related to the actual payment of an earnout. This study, being one of the pioneering studies of postmerger analysis of earnouts, could be an anchor point for future earnout researches. Thus, this paper presents a significant contribution to the limited earnout literature, to the increasing mergers and acquisitions studies, and to the vast literature of finance.
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