Journal article

Authors list: Patschureck, Nils; Sommer, Friedrich; Wöhrmann, Arnt

Publication year: 2015

Pages: 279-316

Journal: Journal of Management Control

Volume number: 26

Issue number: 4

DOI Link: https://doi.org/10.1007/s00187-015-0218-x

Publisher: Springer

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.

Harvard Citation style: Patschureck, N., Sommer, F. and Wöhrmann, A. (2015) Contract design as a risk management tool in corporate acquisitions: theoretical foundations and empirical evidence, Journal of management control, 26(4), pp. 279-316. https://doi.org/10.1007/s00187-015-0218-x

APA Citation style: 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