Why Do M&A Bidders Adopt Performance Commitment Clauses? A Tunneling Perspective

61 Pages Posted: 14 Jul 2020 Last revised: 2 Mar 2023

See all articles by Kai Wu

Kai Wu

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

Maobin Xu

The Chinese University of Hong Kong, Shenzhen

Yuzi Chen

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

Date Written: February 10, 2023

Abstract

Although the literature shows that earnout, a contingent payment contract in acquisitions, has long-run positive market reactions in developed countries, the opposite effect emerges one year after the deal announcement for performance commitment clause, a counterpart in China. The premium paid by bidding firms is transferred from minority shareholders to the controlling shareholders, who have stakes in target firms and liquidate bidding firms' stocks as front runners within one year. The short-term stock outperformance rewards target sellers with career promotion. Our study shows evidence that controlling shareholders adopt performance commitment clauses for tunneling purposes at the cost of minority shareholders.

Keywords: performance commitment, resource tunneling, overpayment

JEL Classification: G34, G38, G14

Suggested Citation

Wu, Kai and Xu, Maobin and Chen, Yuzi, Why Do M&A Bidders Adopt Performance Commitment Clauses? A Tunneling Perspective (February 10, 2023). 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

The Chinese University of Hong Kong, Shenzhen ( email )

2001 Longxiang Boulevard, Longgang District
Shenzhen, 518172

Yuzi Chen

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

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