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Capital Market Performance of Earn-outs
M.Sc. Christian Heimann
Many mergers & acquisitions (M&A) fail and cause enormous welfare losses (e. g. plant closings, lay-offs, tax losses). Reasons can be an inappropriate purchase price, a failed target integration, volatile economic environments and times. To cope with these problems risk reducing techniques like earn-outs or partial acquisitions become increasingly popular. The success of these M&A transactions and their relevant parameters can be analyzed by different and complementary approaches. All these have in common that they are based on corporates’ stock market reactions caused by these transaction events. The most appropriate method to investigate the short-term success of M&A is to conduct an event study. In this case the stock market returns for companies that announce an earn-out are adjusted by the normal reaction of a stock market index. The long-term success of earn-outs can be investigated with the help of the Fama-French Model, buy-and-hold returns or stochastic dominance. The simplest method is the latter one to show long-term success by comparing the cumulative density function between event companies and non-event companies. The primary goal is the identification of relevant success factors to gain a better understanding for risk reducing techniques in acquiring companies. The secondary goal is to find theoretical support of economic theories (transaction costs, agency and real options theory) for earn-outs.


acquisitions, earn-out, mergers

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