Accounting conservatism and the fulfilment of the target’s performance commitment in valuation adjustment mechanism contracts

Zeng, Shiyun; Li, Wenfei; Tang, Qingquan

doi:10.1080/16081625.2020.1828951

Cited by 3 publications

(2 citation statements)

References 47 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Behavioral finance theory holds that overconfident management is more likely to implement M & A activities, because people with irrational behavior characteristics tend to be blindly optimistic about M & A transactions and underestimate M & A risks [ 26 ]; it will also overestimate its ability to control market risks. In order to build a personal business empire, it is willing to pay a higher price than the assessed value of the merged enterprise, forming a higher M & A premium [ 27 ]; at the same time, it is overly optimistic about the operating conditions and performance capabilities of the target companies, leading to high commitments and increasing the risk of performance loss after mergers and acquisitions [ 28 ].On the contrary, if the acquirer shows accounting conservatism, it can increase the possibility of achieving the target commitment by reducing the commitment standard of the target company and increasing the post-merger supervision of the target company [ 29 ]. The feasibility opinions issued by independent financial advisers can enable stakeholders to fully understand the operating conditions [ 28 ].…”

Section: Introductionmentioning

confidence: 99%

The effect of auditor’s cooperation with independent financial advisors on the reliability of performance commitment—Based on the moderating effect of managerial overconfidence

Lin,

Wang,

Zheng

et al. 2023

PLoS ONE

View full text Add to dashboard Cite

Based on the sample of major asset restructuring transactions of Shanghai and Shenzhen A-share listed companies from 2009 to 2018, this paper uses Logit model to examine the impact of auditors ’ cooperation experience with independent financial advisors on the reliability of performance commitments, and to examine the moderating effect of management overconfidence on the relationship between the two. The results show that the cooperation experience between auditors and independent financial advisors is significantly positively correlated with the reliability of performance commitment, and the closer the cooperation experience is, the easier the performance commitment will be realized, this has played a financial intermediary team effect. Further analysis shows that in the context of management overconfidence, the positive relationship between financial intermediaries ’ cooperation experience and the reliability of performance commitment is stronger. The research results enrich the research on the influencing factors of M & A performance commitment and the economic consequences of financial intermediaries ’ cooperation, and help the transaction subjects to rationally view performance commitment and regulators to improve policies and regulations.

show abstract

Section: Introductionmentioning

confidence: 99%

The effect of auditor’s cooperation with independent financial advisors on the reliability of performance commitment—Based on the moderating effect of managerial overconfidence

Lin,

Wang,

Zheng

et al. 2023

PLoS ONE

View full text Add to dashboard Cite

show abstract

“…Song et al (2019) [ 33 ] argue the agency problem may incur an overly high-performance target of VAM contract in acquisition-the acquirer’s top management team may use performance commitment to send a positive signal to the market to serve their self-interests such as cash bonus while neglecting whether the standards can be achieved and thus damage the effectiveness of performance commitment contracts. Zeng et al (2020) [ 34 ]find the accounting conservatism of the acquirer to be positively associated with the target’s fulfillment of the performance commitments in VAM contracts; one reason is that the managers of conservative firms are more cautious, tending to lower the pre-specified performance standards to make them easier to fulfill and reduce the likelihood of asset impairment. Li and Li (2022) [ 35 ] find the acquirer’s CSR plays a positive role in the target’s fulfillment of performance commitment in the VAM agreement.…”

Section: Introductionmentioning

confidence: 99%

The optimal performance target of valuation adjustment mechanism agreement with real options perspective

Xue

Yun

2022

PLoS ONE

View full text Add to dashboard Cite

The valuation adjustment mechanism (‘VAM’) agreement has recently been widely adopted in venture capital investment in emerging markets. The VAM agreement endows venture capital institutions a contractual right to reevaluate invested startup contingent on preset performance targets, which is crucial for the effectiveness of the VAM agreement by deeply affecting the strategy and fate of the startup. Motivated by exploring a rational performance target setting, this paper: 1)Firstly, extracts a general structure of the VAM agreement by cases analysis;2) Secondly, adopts a real options methodology to derive the option value held by venture capital institutions and how the pre-determined performance target affect the payoff of venture capital institutions;3)Thirdly, derives the expected time to achieve the given performance target and the behavior choice of entrepreneurs of startups; 4)Finally, by maximizing the contractual value of venture capital institutions with the participation constraints of the entrepreneur, derives the optimal performance target setting. The result finds that the option value of the VAM agreement is positively related to the performance target. It may partially explain why venture capital institutions tend to dominate overly high targets from a real options perspective. We also confirm the incentive effect of the VAM agreement that entrepreneurs tend to exert their best effort. Furthermore, the derivation of the optimal performance target shows that it is an increased function of the agreement period and a subtractive function of project risk. This paper contributes to the literature on contingent payment mechanisms and provides practical implications for the VAM agreement design.

show abstract

M&A compensation commitment and stock price crash risk: evidence from China

Zhang

Mao

2022

Asia-Pacific Journal of Accounting & Economics

View full text Add to dashboard Cite

Accounting conservatism and the fulfilment of the target’s performance commitment in valuation adjustment mechanism contracts

Cited by 3 publications

References 47 publications

The effect of auditor’s cooperation with independent financial advisors on the reliability of performance commitment—Based on the moderating effect of managerial overconfidence

The effect of auditor’s cooperation with independent financial advisors on the reliability of performance commitment—Based on the moderating effect of managerial overconfidence

The optimal performance target of valuation adjustment mechanism agreement with real options perspective

M&A compensation commitment and stock price crash risk: evidence from China

Contact Info

Product

Resources

About