Acquisitions, Earnouts and Financial Constraints: Evidence from SFAS 141 and SFAS141(R)

Date
2017-08-31
Authors
Wright, Danika
Chen, Xianzhen
Svec, Jiri
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Abstract
This paper studies the acquisition strategies of firms in response to different financial reporting incentives. We focus on the use of earnouts following changes to the accounting treatment of contingent consideration following the 2008 introduction of SFAS 141(R). The revised standards require earnout fair value to be recorded at acquisition date, while earnouts under the previous standards were only reported if, and when, they were paid. Our results indicate that earnout usage decreases in response to increased financial reporting costs of contingent liabilities. This decrease is strongest among financially constrained bidders, who are also observed to decrease participation in M&A markets. A Heckman probit model is employed to correct for sample selection bias. The implications of these findings for deal design and success are discussed.
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Keywords
Earnouts, Information asymmetry, Mergers and acquisitions, Accounting standards
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