Do Performance Commitment Clauses Protect M&A Bidders?

64 Pages Posted: 14 Jul 2020 Last revised: 5 Aug 2022

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

Zejun Jin

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

Date Written: August 5, 2022

Abstract

Existing literature shows that earnout, a contingent payment contract in acquisitions, has a long-run positive market reaction in developed countries. However, the performance commitment clause, a contingent payment widely adopted in China's acquisition deals, brings long-term underperformance to bidding firms. Besides the traditional view of information asymmetry, we highlight a new perspective of overpayment on the bidder side. Specifically, bidding firm managers gain superior stock benefits, and the clauses encourage target-asset sellers to achieve career promotion. Overall, our findings demonstrate that performance commitment clauses fail to protect M&A bidders in an imperfect law environment, as their temporary benefits are at the cost of long-term damage to shareholders.

Keywords: performance commitment, information asymmetry, overpayment

JEL Classification: G10, G11, G14

Suggested Citation

Wu, Kai and Xu, Maobin and Jin, Zejun, Do Performance Commitment Clauses Protect M&A Bidders? (August 5, 2022). 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

Zejun Jin

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

Beijing
China

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