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A catering perspective of performance commitment-evidence from acquisitions in China

Author

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  • Song, Di
  • Shen, Na
  • Su, Jun

Abstract

Performance commitment (PC hereafter), as a mechanism to reduce information asymmetry, has been increasingly applied to the acquisitions and reorganizations of listed companies in China. This study uses catering theory to analyze PC. We propose that managers/controlling shareholders cater to the investors' preferences when deciding whether to adopt PC in acquisitions. PC adoption generates a higher abnormal return in the short run but a lower abnormal return in the long run. Managers/controlling shareholders are motivated to adopt PC to gain short-run benefits by selling stocks after PC's announcement. The study helps to deepen the understanding of performance commitment from a new perspective and contributes to the field of research that views managerial decisions as rational responses to investor sentiment. Our study shows the speculative short-termism effect of regulatory policy in the Chinese capital market, and managers/controlling shareholders capitalize on opportunities in the inefficient market via PC adoption.

Suggested Citation

  • Song, Di & Shen, Na & Su, Jun, 2023. "A catering perspective of performance commitment-evidence from acquisitions in China," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:pacfin:v:78:y:2023:i:c:s0927538x23000537
    DOI: 10.1016/j.pacfin.2023.101987
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    References listed on IDEAS

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    Cited by:

    1. Qingbang Mu & Wanxiao Zhang & Wenxiu Hu, 2023. "Enterprise Transformation and Innovation: A Study of Performance Compensation from the Perspective of Information Asymmetry," Sustainability, MDPI, vol. 15(17), pages 1-23, August.

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    More about this item

    Keywords

    Performance commitment; Catering theory; Acquisitions; China; Investor sentiment;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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