M&A Aggressiveness and Economic Consequences of Performance Commitment

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