Enforcement quality and the use of earnouts in M&A transactions: international evidence

Our paper provides empirical evidence on the effect of a country’s enforcement quality on the probability to include earnout clauses in acquisition contracts. Absent effective legal protection for the earnout holders, the potential benefits of these contracts may turn out to be empty promises, thus limiting the incentives to include them in acquisition deals. Using an international sample of 37,228 deals completed between 2000 and 2015, we show that the inclusion of these contracts in M&As is significantly related to the country’s level of enforcement quality. Furthermore, we show that a similar relation holds for the proportion of earnout payments with respect to total consideration.