Does Performance Commitment Protect M&A Bidders?

52 Pages Posted: 14 Jul 2020 Last revised: 16 Feb 2021

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: February 15, 2021

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

Suggested Citation

Wu, Kai and Xu, Maobin and Jin, Zejun, Does Performance Commitment Protect M&A Bidders? (February 15, 2021). 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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