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Choi, Albert H. --- "Addressing informational challenges with earnouts in mergers and acquisitions" [2016] ELECD 1208; in Hill, A. Claire; Davidoff Solomon, Steven (eds), "Research Handbook on Mergers and Acquisitions" (Edward Elgar Publishing, 2016) 154

Book Title: Research Handbook on Mergers and Acquisitions

Editor(s): Hill, A. Claire; Davidoff Solomon, Steven

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781784711474

Section: Chapter 7

Section Title: Addressing informational challenges with earnouts in mergers and acquisitions

Author(s): Choi, Albert H.

Number of pages: 25

Abstract/Description:

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.