Abstract
This Article seeks to answer the question whether earnouts really serve to respond to adverse selection, as commonly believed, or if alternatively, they better address problems created by symmetric uncertainty. To answer this question, I conduct difference of means tests for fair value estimates of earnouts at the time of acquisition and during the post-closing period. To the extent sellers rely on earnouts during the pre-contractual period to signal unobservable information about their own quality to an acquirer, then post-closing fair value estimates should increase as acquirers confirm seller pre-signing statements. In fact, I do not find significant differences in the fair value disclosures at the time of acquisition and during the post-closing period, which suggests that parties rely on earnouts primarily to resolve problems of uncertainty rather than adverse selection.
Recommended Citation
Brian JM Quinn,
Putting Your Money Where Your Mouth Is: The Performance of Earnouts in Corporate Acquisitions,
81 U. Cin. L. Rev.
(2013)
Available at: https://scholarship.law.uc.edu/uclr/vol81/iss1/3