Does Performance Commitment Protect M&A Bidders?

Abstract

We evaluate whether performance commitment clauses in M&A deals protect bidders from M&A risks. Using a sample of Chinese M&A deals from 2007 to 2019, we find that the adoption of performance commitment clauses is associated with higher corporate risk-taking. Such an effect is alleviated in related-party transactions. Performance commitment is generally related to aggressive bidding. It imposes negative long-term economic consequences to bidding firms on goodwill impairment, earning management, and firm valuation. However, it helps target firms achieve backdoor listing, gains bidding firms superior short-term performance, and promotes target-asset sellers to obtain career development. Overall, our findings highlight that performance commitment clauses fail to protect M&A bidders and even increase the M&A risk.

Keywords: performance commitment, corporate risk-taking, bidding aggressiveness

JEL Classification: G10, G11, G14