Fair Value of Earnouts: Valuation Uncertainty or Managerial Opportunism?

Ferguson, A; Hu, CW; Lam, P

Fair Value of Earnouts: Valuation Uncertainty or Managerial Opportunism?

Ferguson, A

Hu, CW Lam, P

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Publisher:: American Accounting Association
Publication Type:: Journal Article
Citation:: Accounting Review, 2024, 99, (3), pp. 141-167
Issue Date:: 2024-10-01

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Field	Value	Language
dc.contributor.author	Ferguson, A https://orcid.org/0000-0003-0535-0643
dc.contributor.author	Hu, CW
dc.contributor.author	Lam, P
dc.date.accessioned	2024-08-07T02:55:37Z
dc.date.available	2024-08-07T02:55:37Z
dc.date.issued	2024-10-01
dc.identifier.citation	Accounting Review, 2024, 99, (3), pp. 141-167
dc.identifier.issn	0001-4826
dc.identifier.issn	1558-7967
dc.identifier.uri	http://hdl.handle.net/10453/180180
dc.description.abstract	ABSTRACT This study investigates the economic consequences of the IFRS 3 2008 requirement for fair valuing earnouts Using a hand collected sample of earnout fair value estimates in acquisitions completed by Australian firms we find that a significant portion of acquirers overstate initial earnout liabilities and strategically reverse them as operating gains to boost post M A earnings These overstatements are more pronounced when acquirers face investment and performance related pressure but attenuated in the presence of high quality auditors and debt financed deals Acquirers also obfuscate earnout related disclosures inhibiting investors assessment of earnout values By doing so managers extend their tenure Further analysis reveals that IFRS 3 2008 leads to a significant increase in both the frequency and magnitude of earnouts in public acquirers transactions Overall we highlight the accounting benefit of earnouts for acquirers under IFRS 3 2008 with implications for investors analysts auditors and standard setters Data Availability Data are available from the public sources cited in the text JEL Classifications G34 M41
dc.language	en
dc.publisher	American Accounting Association
dc.relation.ispartof	Accounting Review
dc.relation.isbasedon	10.2308/tar-2021-0613
dc.rights	info:eu-repo/semantics/closedAccess
dc.subject	1501 Accounting, Auditing and Accountability
dc.subject.classification	Accounting
dc.subject.classification	3501 Accounting, auditing and accountability
dc.subject.classification	3502 Banking, finance and investment
dc.title	Fair Value of Earnouts: Valuation Uncertainty or Managerial Opportunism?
dc.type	Journal Article
utslib.citation.volume	99
utslib.for	1501 Accounting, Auditing and Accountability
pubs.organisational-group	University of Technology Sydney
pubs.organisational-group	University of Technology Sydney/Faculty of Business
pubs.organisational-group	University of Technology Sydney/Faculty of Business/Accounting Discipline
utslib.copyright.status	closed_access	*
pubs.consider-herdc	true
dc.date.updated	2024-08-07T02:55:36Z
pubs.issue	3
pubs.publication-status	Published
pubs.volume	99
utslib.citation.issue	3

Abstract:

ABSTRACT This study investigates the economic consequences of the IFRS 3 2008 requirement for fair valuing earnouts Using a hand collected sample of earnout fair value estimates in acquisitions completed by Australian firms we find that a significant portion of acquirers overstate initial earnout liabilities and strategically reverse them as operating gains to boost post M A earnings These overstatements are more pronounced when acquirers face investment and performance related pressure but attenuated in the presence of high quality auditors and debt financed deals Acquirers also obfuscate earnout related disclosures inhibiting investors assessment of earnout values By doing so managers extend their tenure Further analysis reveals that IFRS 3 2008 leads to a significant increase in both the frequency and magnitude of earnouts in public acquirers transactions Overall we highlight the accounting benefit of earnouts for acquirers under IFRS 3 2008 with implications for investors analysts auditors and standard setters Data Availability Data are available from the public sources cited in the text JEL Classifications G34 M41

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http://hdl.handle.net/10453/180180