Lucile Faurel

Economic Determinants and Information Environment Effects of Earnouts: New Insights from SFAS 141(R)

Contingent considerations (earnouts) in acquisition agreements provide sellers with future payments conditional on meeting certain conditions. Prior research provides evidence that acquiring firms use earnouts to minimize agency costs associated with acquisitions. Using earnout fair value information, recently mandated by SFAS 141(R), we provide new insights into the economic determinants to include earnout provisions in acquisition agreements, including motivations to resolve moral hazard and adverse selection problems, bridge valuation gaps, and retain target firm managers. We document variations in initial earnout fair value estimates and earnout fair value adjustments that correspond with these underlying motivations. We also provide evidence that target managers stay longer with the firm after the acquisition when earnouts are included primarily to retain target managers. Finally, we demonstrate that earnout fair value adjustments required by SFAS 141(R) provide valuable information to market participants and are negatively associated with the likelihood of contemporaneous and future goodwill impairments.

Insider Trading and Post-Earnings Announcement Drift

This paper examines the association between insider trading during the pre-earnings announcement period and the magnitude of the post-earnings announcement drift (PEAD). Consistent with insiders’ private information being incorporated into prices through their trading, we find PEAD is significantly lower when earnings announcements are preceded by insider trading. This negative association between insider trading and PEAD is stronger when information asymmetry between insiders and outsiders is higher, and when internal and external monitoring of insider trades is weaker. However, in contrast to our primary results, we find that in cases of confirming insider trading (i.e., high levels of insider buying (selling) preceding large positive (negative) earnings surprises), PEAD is significantly larger. Our evidence suggests such trades are based on insiders’ private information about earnings surprises in subsequent quarters and the market fails to fully account for the information contained in these trades. Overall, our findings indicate insider trading contributes to stock pricing efficiency by conveying insiders’ private information to the market.

CEO Incentives and New Product Development: Insights from Trademarks

New product development is critical for firms to achieve and maintain growth and performance. We build a novel dataset of 123,545 USPTO trademark registrations by S&P 1500 firms from 1993 to 2011 to study whether and how CEO compensation risk incentives motivate new product development. Using the OECD’s broad definition of innovation that includes new product development, our tests offer evidence on how risk incentives affect innovation of new products. We find that the number of trademarks increases with the fraction of compensation in the form of stock options, the convexity of incentives, and unvested stock options, both in low-patent (non-high-tech) and high-patent (high-tech) industries. Using a revised accounting rule, SFAS 123(R), as an exogenous shock, we find that reductions in stock option compensation cause reductions in trademark creation. Overall, the evidence indicates that CEO risk-taking incentives are important drivers of product development.