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Make a promise: the valuation adjustment mechanism in Chinese private target acquisitions

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  • XiaoGang Bi

Abstract

The valuation adjustment mechanism (VAM) is a contingent-payment contractual arrangement used in the Chinese mergers and acquisitions (M&As) market. The ‘two-direction payment’ design of Chinese VAMs can reduce deal uncertainty and generate value, especially for poorly performing companies that can use VAM contracts to boost short-term performance. I find in this empirical investigation that acquirers applying VAM terms have significantly higher market returns after addressing endogeneity. I also document that poorly performing bidders sign larger VAM contracts, pay higher bid premiums and achieve higher operating performance, and which types of firms are more likely to adopt a VAM in transactions.

Suggested Citation

  • XiaoGang Bi, 2021. "Make a promise: the valuation adjustment mechanism in Chinese private target acquisitions," The European Journal of Finance, Taylor & Francis Journals, vol. 27(16), pages 1645-1668, November.
    • Handle: RePEc:taf:eurjfi:v:27:y:2021:i:16:p:1645-1668
    DOI: 10.1080/1351847X.2021.1903963
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    Cited by:

    1. Sun, Zeyu & Kong, Ningning & Wu, Lei & Bao, Yu, 2024. "Does contingent payment in M&As induce acquirers’ earnings management? Evidence from performance commitment," Research in International Business and Finance, Elsevier, vol. 69(C).
    2. Cheng, Zijian & Liu, Zhangxin (Frank) & Wang, Isabel Zhe & Zhao, Xingju, 2024. "Reverse merger audit fee premium: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 94(C).

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