ABSTRACT This paper examines the causal link between local gambling attitudes and the use of earnouts in mergers and acquisitions. Using a large sample of Chinese M&As, we find that deals are more likely to include earnout provisions when targets are located in regions with stronger gambling preferences. The effect strengthens with information complexity but weakens under greater external monitoring. Moreover, targets in gambling‐prone regions obtain higher acquisition premiums when earnouts are used, while acquirers show no improvement in announcement returns. Overall, our findings highlight the behavioural dimension of financial contracting and the influence of cultural norms on corporate decisions.
Ma et al. (Thu,) studied this question.