Research On "Voluntary" Performance Commitment From The Perspective Of Information Asymmetry In M&A

In recent years,with the dual background of China’s economic slowdown and economic restructuring,the development of enterprises has generally enter the bottleneck period of strategic adjustment.Due to the advantages of strong timeliness and large change range,M&A has become an important way for enterprises to realize strategic adjustment.The number of M&A increase rapidly and the scale of M&A expand sharply.M&A,however,do not always achieve strategic goals.Some studies believe that M&A will increase the wealth of the targets’ shareholders,but there are different impact on the wealth of the acquirers’ shareholders.Most studies even confirm that M&A will reduce the wealth of the acquirers’ shareholders.Among all reasons that lead to the failure of M&A,the risk caused by M&A information asymmetry is in the dominant position.On one hand,M&A information asymmetry will lead to adverse selection,which result acquirer pay too much for a low quality target enterprise.On the other hand,M&A information asymmetry will aggravate moral hazard of target,which is not conducive to the creation of M&A’s value in the integration stage.At the same time,there is an increasing trend of information asymmetry in M&As in China,which is manifested in the increasing proportion of service-oriented and high-tech target,the increasing proportion of cross-border M&A,the increasing proportion of revenue approach valuation.In order to complete M&A and protect investors,it is necessary to make appropriate institutional arrangements to alleviate M&A information asymmetry.Performance commitment belongs to broad valuation adjustment mechanism,and the core function of broad valuation adjustment mechanism is to mitigate M&A’s risk caused by information asymmetry: On one hand,when performance defaults,the target needs to compensate the acquirer,which avoids acquirer excessive payment for low-quality asset and reduces valuation risk caused by adverse selection.On the other hand,in order to avoid triggering the compensation obligation in case of performance default,the targets’ shareholders will work hard to achieve the performance goal in the performance commitment period and reduce the integration risk caused by moral hazard.However,it should be noted that performance commitment may also generate new M&A’s risks: Firstly,performance commitment may not be able to achieve the incentive compatibility of both parties,the target party can take short-sighted speculation to achieve the performance goals,which is not conducive to value creation.Secondly,in order to avoid the negative impact of the target party’s speculation,the acquirer needs to supervise the behavior of the target party during the performance commitment period.Finally,both sides need to pay negotiation cost to sign performance commitment,and execution cost of compensation procedure when target party defaults,which leads to higher transaction cost.In recent years,performance commitment is more and more widely used in the field of M&As.Starting from the general theory of valuation adjustment mechanism,it is helpful to analyze the benefits and costs of performance commitment,so as to better grasp the nature of performance commitment.The design principles of performance commitment is similar to earn-out which is used in foreign countries’ M&A,but the two differ in many aspects.First,they differs in the way of mechanism selection.Singing earn-out is completely decided by two parties in foreign M&A,and the regulatory authorities just emphasize the information disclosure obligation related earn-out.According to "rules for administration of reorganization material assets",performance commitments must be signed under certain circumstances,the M&A parties may Voluntarily sign performance commitments under other circumstances.Domestic M&A parties do not have all the freedom to choose performance commitment;Second,they differs in the way of contract terms.On one hand,there are differences in terms such as the timing of valuation adjustment,the direction of valuation adjustment and the goal of valuation adjustment between performance commitment and earn-out.On the other hand,foreign M&A parties can fully determine the design of the terms in earn-out,while the design of the terms in "mandatory" performance commitment in domestic M&A is subject to regulatory policies,and the M&A parties do not have all the freedom to design contract terms;Finally,they also differs in M&A’s performance.The target in earn-out has a low default frequency,while the performance commitment shows the coexistence of "high commitment" and "high premium",the coexistence of "high commitment" and "high default rate",and the "accurate performance achievement",and the M&A’s performance is quite questioned.Exogenous "mandatory" performance commitment standard is the root cause of the "dichotomy" of performance commitment selection,and the difference way of performance commitment selection will further affect the design of contract terms and M&A’s performance.Therefore,the way of performance commitment selection is a logical starting point for analyzing the problems related to performance commitment.When studying the performance commitment,we should not blindly refer to the relevant research on earn-out.We must grasp the factual premise that "mandatory" performance commitment and "voluntary" performance commitment coexist.Performance commitment not only has the generality of the valuation adjustment mechanism,but also has the particularity of the China’s system background.However,there is a lack of thinking on the dual nature of performance commitment in relevant literature: on one hand,due to the fact that performance commitment is initiated by regulatory policies,the vast majority of researches regard performance commitment as a quasi-natural experiment under established regulatory policies,and lack of discussion on how to choose performance commitment by M&A parties.With the continuous improvement of "mandatory" performance commitment standard and the gradual accumulation of performance commitment practice experience,the decision-making right of M&A parties to performance commitment is further improved,and "voluntary" performance commitment has become the main form of performance commitment.The ignorance of the influence factors on performance commitment is not in line with the objective facts of the M&A market,and is not conducive to a comprehensive understanding of the game process of performance commitment;On the other hand,in view of the fact that "mandatory" performance commitment is dominant in early stage,most studies regard performance commitment as a whole and fail to distinguish between "mandatory" performance commitment and "voluntary" performance commitment."Mandatory" performance commitment is not the choice of the M&A parties,and the performance commitment against the willingness of M&A parties is very likely to lead to system operation deviation.For "voluntary" performance commitment,whether the performance commitment can play its value depends on the market-oriented decision-making ability and execution ability from both parties.Ignoring the difference in the choice of performance commitment will not only reduce the reliability of research conclusions,but also affect the objective evaluation of regulatory policies.In view of the lack of existing research,this paper combine with the general theory of M&A’s valuation adjustment mechanism and the particularity of China’s regulatory policy background,and Carry out the research as the following way:system background analysis,literature review,current situation of performance commitment,the influence factors of "voluntary" performance commitment,the influence factors of contract terms in "voluntary" performance commitment,comparison of the effect of "mandatory" performance commitment and "voluntary" performance commitment on M&A performance,related conclusions and policy suggestions.Through theoretical analysis and empirical research,this paper focuses on explaining the following three core questions:(1)for M&A that do not meet the "mandatory" performance commitment standard,which factors will affect the introduction of "voluntary" performance commitment in M&A?(2)what factors will affect the design of contract terms in the performance commitment in the event of a "voluntary" performance commitment?(3)Does "voluntary" performance commitment have a better impact on M&A revenue than "mandatory" performance commitment? The main conclusions are as follows:1.The proportion of performance commitment in M&A increases year by year,among which the proportion of "voluntary" performance commitments increases rapidly,while the proportion of "mandatory" performance commitments tends to be stable.The contract terms of "voluntary" performance commitment is quite different from that of "mandatory" performance commitment.2.The higher the degree of information asymmetry in M&A,the greater the probability of introducing "voluntary" performance commitment in M&A.Specifically,the greater the relative scale of M&A and the uncertainty of target party’s industry,the higher probability to introduce "voluntary" performance commitment in M&A,which is consistent with the conclusion of foreign earn-out research.Compared with non-related M&A,the frequency of "voluntary" performance commitment in related M&A is higher,which is in line with the particularity of China’s capital market.The ability of M&A will affect the acquirer’s ability to select "voluntary" performance commitments based on institutional benefits.Specifically,M&A experience and internal governance of acquirer can enhance the positive relationship between information asymmetry in M&A and "voluntary" performance commitment,while overconfidence of managers can reduce the relationship.In addition,the external governance of the target and the reputation of the asset appraisal agency will weaken the positive relationship between information asymmetry and "voluntary" performance commitment.3.In general,the higher the degree of information asymmetry in M&A,the more inclined the design of contract terms in "voluntary" performance commitment is to enhance the incentive of the target party or increase the responsibility of the target party.Specifically,the higher the degree of information asymmetry,the longer the term of performance commitment,the greater the probability of two-way performance commitment and the higher the degree of performance commitment.However,the degree of information asymmetry in M&A will reduce the probability of compensation in the form of shares,which may be related to the bargain between the two parties.In the study of heterogeneity,M&A experience of acquirer will strengthen the relationship between the information asymmetry in M&A and each contract terms.In addition,the increase of information asymmetry in M&A and financing constraints of acquirer will both improve the probability of choosing performance deferred payment,which has the dual functions of risk control and credit support.4.In the short-term effect of M&A,"mandatory" performance commitment increases both the short-term revenue of acquirer and the short-term revenue of target,while "voluntary" performance commitment has no significant impact.The signal effect of "mandatory" performance commitment is strong,but the acquirer pays more for the merger;"Mandatory" performance commitment increases the short-term value of M&A but reduces the short-term real revenue of acquirer,while "voluntary" performance commitment had no significant impact.Although "mandatory" performance commitment creates the value of M&A,the target shareholder occupies much in the form of premium,which result the reduction of acquirer shareholder’s real revenue.5.In the long-term effect of M&A,"mandatory" performance commitment and "voluntary" performance commitments do not enhance the long-term revenue of acquirer,the long-term revenue of target or the long-term value of M&A.However,the "mandatory" performance reduce the long-term value of M&A.Wealth distribution effect caused by "Mandatory" performance commitments will last a long time.From the performance implementation perspective,the influence on achievement of performance commitment has no difference between "mandatory" performance commitment and "voluntary" performance commitment,but "voluntary" performance commitment has a higher completion ratio than that in "mandatory" performance commitment."performance precision" phenomenon is more frequent in "Mandatory" performance commitment.Finally,based on the relevant conclusions,this paper puts forward policy Suggestions on regulatory policy reform and performance commitment risk prevention.