Research On Acquired Company’s Earnings Management Cause By Performance Compensation Commitment

In recent years,the number of transactions that have signed performance compensation commitment in M&A transactions has risen sharply,and the promised profits have also become higher.If the promised profits is too high to achieve,the acquired party may conduct earnings management to avoid huge compensation.Some acquired parties performed earnings management during the performance commitment period to achieve their promised performance,but their performance plummeted after the performance commitment period,which brought great negative economic consequences to the acquirer,and severely disrupted the order of the capital market.Under the circumstances,this paper selects the typical case of Jiawei Renewable Energy’s acquisition of Huayuan New Energy,and analyzes the earnings management behavior of the acquired party caused by performance compensation commitments.After the summary of relevant theories and literature,the current status of M&A and performance compensation commitment were set forth.Then,from the perspective of the acquired party Huayuan New Energy,the earnings management behavior behind its performance commitments was explored.First of all,the process of Jiawei Renewable Energy’s acquisition of Huayuan New Energy is sorted out.Next,the earnings management behavior of Huayuan New Energy was identified from financial and non-financial perspectives,and the level of earnings management of Huayuan New Energy during the performance commitment period was verified by modified Jones model.Then,the specific methods Huayuan New Energy adopted to achieve the promised performance was analyzed.Finally,the negative economic consequences of the earnings management behavior on the acquired party was analyzed.The findings indicate that,in order to achieve the promised performance,Huayuan New Energy has used earnings management methods to improve performance to achieve the promised performance.Huayuan New Energy’s performance changes after the performance commitment period has led to negative economic consequences of Jiawei Renewable Energy,including huge impairment of goodwill,decline in financial performance and high risk of bankruptcy.Through the above case analysis,this paper puts forward preventive suggestions for the earnings management behaviors caused by performance compensation commitments.When signing performance compensation commitments,both parties should consider the applicability of performance compensation commitments,use diversified commitment indicators to form benign incentives,and appropriately adopt two-way performance compensation commitments to achieve equity equivalence.For regulators,an information disclosure system should be established,a performance commitment system should be improved,and the integration effect should be strengthened.Afterwards,they should inquire about the precise compliance of one-way commitments and two-way commitments,so that earnings management behaviors caused by performance commitments have nowhere to hide.