Edited by Claire A. Hill and Steven Davidoff Solomon
Chapter 7: Addressing informational challenges with earnouts in mergers and acquisitions
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.
You are not authenticated to view the full text of this chapter or article.
Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.
Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.
Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.