M&A Aggressiveness and Economic Consequences of Performance Commitment

49 Pages Posted: 14 Jul 2020 Last revised: 24 Jul 2020

See all articles by Kai Wu

Kai Wu

Central University of Finance and Economics (CUFE) - School of Finance

Maobin Xu

Central University of Finance and Economics (CUFE) - School of Finance

Zejun Jin

Central University of Finance and Economics (CUFE) - School of Finance

Date Written: July 23, 2020

Abstract

We evaluate the economic consequences of the performance commitment clauses in the merger and acquisition (M&A) deals from 2007 to 2017 in China. We find that M&A aggressiveness measures are positively associated with failure of delivering performance commitment. Such effect is alleviated in cash-paid deals or those with cash compensation or mutual compensation arrangement. Although the performance commitment clauses bring short-term benefits to both parties in M&A deals, they impose negative economic consequences on firm value and career of target-firm directors. Overall, our findings highlight the important role of performance commitment clauses in the financial risk of M&A activities.

Keywords: M&A, performance commitment, goodwill impairment, firm value

JEL Classification: G10, G11, G14

Suggested Citation

Wu, Kai and Xu, Maobin and Jin, Zejun, M&A Aggressiveness and Economic Consequences of Performance Commitment (July 23, 2020). Available at SSRN: https://ssrn.com/abstract=3632557 or http://dx.doi.org/10.2139/ssrn.3632557

Kai Wu (Contact Author)

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

Maobin Xu

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

Zejun Jin

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

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