Do Performance Commitment Clauses Protect M&A Bidders?
64 Pages Posted: 14 Jul 2020 Last revised: 5 Aug 2022
Date Written: August 5, 2022
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: Suggested Citation