Electronic copy available at: https://ssrn.com/abstract=2800794 1 Religion and Mergers and Acquisitions Contracting: The Case of Earnout Agreements. * By Ahmed M. Elnahas a , M. Kabir Hassan b.** , and Ghada M. Ismail c ABSTRACT As currently practiced, earnout agreements in mergers and acquisitions lead to significant agency problems and also violate Islamic law. First, using regression and difference-in-difference techniques, we show that target managers significantly increase earnings by cutting discretionary expenses during earnout periods. Also, comparing matched samples, acquisitions with earnout clauses are followed by significantly lower long-term abnormal returns. Second, earnout agreements involve high uncertainty, ignorance, and possibly harmful consequences, all of which are prohibited in Islamic law. We propose alternatives to earnout agreements as currently structured that address both the agency and Islamic law issues. Keywords: Mergers and Acquisitions, Earnout agreements, Islamic finance, Earnings management, Agency cost. JEL Classification: G15, G34, M48, N30. a Eastern Kentucky University. College of Business and Technology, 521 Lancaster Avenue #137, Richmond, KY 40475. Phone: 859-622-1378, e-mail: ahmed.elnahas@eku.edu b The University of New Orleans. College of Business Administration, 408G Kirschman Hall, New Orleans, LA 70148. Phone: 504-280-6163, e-mail: mhassan@uno.edu And c The University of Memphis. Fogelman College of Business and Economics, 3675 Central Avenue #437, Memphis, TN 38152. Phone: 859-893-4900, e-mail: gismail@memphis.edu * This research did not receive any specific grant from funding agencies in the public, commercial, or non-for-profit sectors. ** All correspondence should be addressed to M. Kabir Hassan.