Contract design as a risk management tool in corporate acquisitions: theoretical foundations and empirical evidence
Patschureck N, Sommer F, Wöhrmann A (2015)
Publication Type: Journal article
Publication year: 2015
Journal
Book Volume: 26
Pages Range: 279-316
Journal Issue: 4
DOI: 10.1007/s00187-015-0218-x
Abstract
This paper provides an overview of contractual measures to reduce acquisition risk for buyers in corporate acquisitions. We distinguish between measures applicable between signing and closing and those used after closing. The most important of these measures are purchase price adjustment agreements, material adverse change clauses, method of payment, earnout agreements, and warranties. We present the theoretical background for each measure as well as results of empirical research. We conclude that adequate contract design can effectively reduce acquisition risk, particularly with respect to target valuation uncertainty stemming from asymmetric information. Despite this potential, empirical research reveals that the use of contractual measures remains underdeveloped and therefore unexploited, especially in Europe. The most important constraints on these contractual measures include complexity, cost of implementation, susceptibility to litigation of sophisticated contract design, and seller bargaining power. The analysis includes suggestions for further research in this area.
Involved external institutions
Germany (DE)How to cite
APA:
Patschureck, N., Sommer, F., & Wöhrmann, A. (2015). Contract design as a risk management tool in corporate acquisitions: theoretical foundations and empirical evidence. Journal of Management Control, 26(4), 279-316. https://doi.org/10.1007/s00187-015-0218-x
MLA:
Patschureck, Nils, Friedrich Sommer, and Arnt Wöhrmann. "Contract design as a risk management tool in corporate acquisitions: theoretical foundations and empirical evidence." Journal of Management Control 26.4 (2015): 279-316.
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