Earnouts in M&A deal structuring: The impact of CEO prevention focus

Abstract This empirical study leverages the theoretical underpinnings of regulatory focus theory, an influential theory of self-regulation, to investigate the impact of CEOs' dispositional prevention focus on firms' deal structuring choices in mergers and acquisitions. We build on the argument that the dispositional prevention focus of individuals is associated with a higher perception of risk and a preference for non-losses. Accordingly, this study suggests a positive relationship between the intensity of an acquiring firm CEO's dispositional prevention focus and the firm's propensity to use earnouts as a post-closing risk-mitigating instrument in the deal consideration structure. Furthermore, this study accounts for the important role of contextual cues in priming dispositional prevention focus through the concepts of regulatory fit and misfit and examines the moderating impact of M&A deals involving foreign targets and the acquiring firm's acquisition experience on the baseline relationship. We test our predictions on a dataset comprising 217 deals from 2006 to 2011 in the United Kingdom. Building on the micro-foundations of strategy, these findings contribute to the literature on deal structuring choices in mergers and acquisitions.