Mitigating Risk in International Mergers and Acquisitions: The Role of Contingent Payouts

• Published in: Journal of international business studies Vol. 35; no. 1; pp. 19 - 32
• Main Authors: Reuer, Jeffrey J., Shenkar, Oded, Ragozzino, Roberto
• Format: Journal Article
• Language: English
• Published: Basingstoke Palgrave Macmillan Journals 01-01-2004; Palgrave Macmillan
• Series: Journal of International Business Studies
• Subjects: Abnormal returns; Acquisitions & mergers; Adverse selection; Bids; Business risks; Business structures; Common law; Corporate mergers; Globalization; High technology industries; Host country; Information asymmetry; Intangible assets; International markets; Investments; Joint ventures; Market entry; Methods; Multinational corporations; Risk management; Service industries; Studies; Target acquisitions; Valuation
• ISSN: 0047-2506; 1478-6990
• DOI: 10.1057/palgrave.jibs.8400053

Previous internationalization studies have focused on the entry modes employed by multinational firms but have not considered the contractual heterogeneity that underlies each mode. It is important to examine these contractual details, as the firm may be able to obtain some of the benefits typically associated with one entry mode while selecting another. In the case of international mergers and acquisitions (M&As), a key contractual variable is whether the parties agree to a performance-contingent payout structure, which can mitigate the risk of adverse selection. In this paper, we examine the antecedents of contingent payouts in the form of earnouts and stock payments. The results indicate that firms lacking international and domestic acquisition experience turn to contingent payouts when purchasing targets in high-tech and service industries. Firms tend to avoid contingent payouts in host countries with problems with investor protection and legal enforceability.