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We analyse the implications of initial payment methods in earnout deals on acquirers’ gains. The results, which are robust to self‐selection bias and alternative model specifications, reveal that earnout deals outperform non‐earnout deals. The acquirers gain the most from earnout deals when both initial and deferred payments are in stocks. The positive wealth effect of the choice of initial payment method in earnout deals is more prominent in cross‐border deals than in domestic deals. Overall, the earnout deals generate higher gains when both the initial and deferred payments help spread the risk between the shareholders of acquiring and target firms.

Limited investor attention allows overvalued companies to engage in stock-financed acquisitions of listed target firms without experiencing significant reductions in their existing valuations. Our robust findings show that overvalued stock-paying acquirers that are subject to limited investor attention do not experience significant announcement period wealth losses. However, the overvaluation of these acquirers is corrected in the post-announcement period. On the contrary, the overvalued acquirers that receive high investor attention and use stock as the payment method in their listed-target acquisitions experience negative announcement period abnormal returns. The widely documented evidence that stock-financed acquisitions are associated with significant announcement period wealth losses is primarily driven by deals in which the acquirers are subject to high investor attention. K eywords: investor attention, corporate takeovers, payment method, acquirer abnormal returns. JE L Classification: G34. We are grateful to comments and suggestions offered by the participants of the 14th INFINITI Conference on International Finance, Dublin, Ireland, June 2016 and the BAFA Scottish Area Group meeting, Strathclyde, UK, August 2016. The authors are also grateful for comments and suggestions offered by Faten Hammoud, Marc Morris and the participants in the seminar series of the School of Economics and Finance at the University of St. Andrews. Any remaining errors remain are ours.Investor attention affects the reaction to announced takeovers Low attention incentivizes overvalued firms to engage in stock-financed M&As These acquirers realize limited announcement period losses The overvaluation of these acquirers is only corrected in the long-run *Highlights (for review) AbstractLimited investor attention allows overvalued companies to engage in stock-financed acquisitions of listed target firms without experiencing significant reductions in their existing valuations. Our robust findings show that overvalued stock-paying acquirers that are subject to limited investor attention do not experience significant announcement period wealth losses. However, the overvaluation of these acquirers is corrected in the post-announcement period. On the contrary, the overvalued acquirers that receive high investor attention and use stock as the payment method in their listed-target acquisitions experience negative announcement period abnormal returns. The widely documented evidence that stock-financed acquisitions are associated with significant announcement period wealth losses is primarily driven by deals in which the acquirers are subject to high investor attention.