Research Handbook on Mergers and Acquisitions
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Research Handbook on Mergers and Acquisitions

Edited by Claire A. Hill and Steven Davidoff Solomon

Global in scope and written by leading scholars in the field, the Research Handbook on Mergers and Acquisitions is a modern-day survey of the state of M & A. Its chapters explore the history of mergers and acquisitions and also consider the theory behind the structure of modern transaction documentation. The book also address other key M & A issues, such as takeover defenses; judges and practitioners' perspectives on litigation; the appraisal remedy and other aspects of Federal and state law, as well as M & A considerations in the structure of start-ups. This Handbook will be an invaluable resource for scholars, practitioners, judges and legislators.
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Chapter 7: Addressing informational challenges with earnouts in mergers and acquisitions

Albert H. Choi


This chapter examines the role played by earnouts in mergers and acquisitions transactions. When one party is better informed of the true value of the deal than the other, the parties face the well-known ‘lemons’ problem, which could prevent them from consummating the transaction even when both are aware that the deal will produce a positive (but uncertain) surplus. By harnessing post-closing, verifiable information, earnouts allow the transacting parties to overcome this informational challenge. The essay also analyzes: (1) how the adoption and the size of an earnout will vary depending on the transactional characteristics; and (2) the earnout design issues when the parties face the problems of ex-post moral hazard, such as engaging in inefficient behavior to either maximize or minimize the earnout payment.

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