A trust agreement is a contract that defines the terms between the parties involved and the liability of each. Escrow agreements typically involve an independent third party, an agent called Escrow, who holds a valuable asset until the specified conditions of the contract are met. They should, however, fully encircr the conditions for all parties concerned. Main results Trust agreements are more frequent when the transaction risk is high, i.e. for: • autonomous private objectives, objectives with dominant shareholders, larger objectives (in relation to the acquirer). • The use of trust agreements reduces the time before the transaction is concluded by 35.5 to 51.0%. Trust agreements are more common when the risk of information asymmetry is high, i.e.: • Objectives for inter-professional acquisitions, high-provision targets, targets in sectors with high earnings volatility or low analyst coverage, objectives that are financially limited. Trust agreements are more common when other risks may exist, for example.B.: • When reinsurance is not included in the form of limitations of liability (or caps). Therefore, trust agreements are a guarantee offered by the seller in order to protect against general information asymmetrySy Symmetric information is, as the term says, unequal, disproportionate or unilateral information. It is typically used in connection with a type of transaction or financial agreement in which one party has more or more detailed information than the other. problems and risks related to the acquisition of bidding companies.
Endgenicity & Instrumental Variables Selection Acceptance of a trust agreement is an endogenous evaluation w.r.t. Need for relevant (i) and (ii) proprietary instruments to determine the choice of fiduciary option. Two instruments: – the propensity of the target group by industry peers to use such contracts. – the reputation of the tenderer for using hybrid securities (including fiduciary contracts). Check the validity of these instruments through series of tests: – Overidentification test (Sargan statistics). – identification sub-tests (partially R-square instruments, excluding F-Stat). Implications If bidders and sellers benefit on average from the use of trust agreements, shouldn`t all unlisted target acquisitions use it? Possible reasons why these contracts are not used in all businesses: • sellers who are aware of potential false information provided by representatives and warranties. • Discord between target shareholders regarding the inclusion of a fiduciary service. • Sellers who urgently need liquidity (treuhandservice reduces liquidity).
Positive association b/n Trust Agreement Use and Bidder Acquisitions Announcement returns do not mean that all bidders must use the Escrow Contract. Trust agreements are often the most valuable when used when acquiring an entire private company and not when acquiring a subsidiary of a larger group (under which the buyer would claim a right to compensation/guarantee against the remaining group). As a result, trust agreements are used in 65% of acquisitions of private companies, compared to only 32% of subsidiaries. . . .