Earnout Provisions and Acquirer Announcement Returns in Mergers and Acquisitions

Abstract

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