Performance commitment in acquisitions, regulatory change and market crash risk–evidence from China

Abstract

We find that performance commitment provisions in Chinese acquisitions show positive economic outcomes measured by improved abnormal returns and lower market crash risk using hand-collected data. We further illustrate that the positive effects of performance commitment contracts are alleviated when TMTs have a high level of self-interests. We also investigate that, regulatory adjustments actually worsen the positive effect of performance commitment in acquisitions. The fact shows the short-termism effect of Chinese capital market imposed by the regulatory changing risk. Our study complements the earnout literature and show distinctive Chinese characteristics.