The role of earnout financing on the valuation effects of global diversification

Barbopoulos, L. G., Danbolt, J. and Alexakis, D. (2018) The role of earnout financing on the valuation effects of global diversification. Journal of International Business Studies, 49(5), pp. 523-551. (doi: 10.1057/s41267-017-0142-4)

Abstract

This article examines the impact of earnout financing on the value of acquiring firms engaged in cross-border acquisitions (CBAs), using a dataset of UK, US, Canadian and Australian firms from 1992 to 2012. The results show that firms initiating international business operations via earnout-financed CBAs enhance their value more than acquirers in (a) domestic acquisitions and (b) remaining CBAs by established multinational corporations (MNCs). Our findings demonstrate the superiority of earnout financing in CBAs announced by acquirers that have no prior international business experience. The results are robust to the firms’ endogenous choice to diversify globally and to the use of earnout financing. We contend that earnouts contribute to the reduction of valuation risk faced by firms acquiring a foreign target firm for the first time. Our empirical findings contribute to the existing debate on the merit of international expansion through CBAs and the role of earnout contingent payment.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Barbopoulos, Dr Leonidas
• Authors: Barbopoulos, L. G., Danbolt, J., and Alexakis, D.
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: Journal of International Business Studies
• Publisher: Palgrave Macmillan
• ISSN: 0047-2506
• ISSN (Online): 1478-6990
• Published Online: 17 February 2018
• Copyright Holders: Copyright © 2018 Academy of International Business
• First Published: First published in Journal of International Business Studies 201849(5): 523-551
• Publisher Policy: Reproduced in accordance with the publisher copyright policy