The determinants and consequences of performance commitment contracts in M&As

Liu, Ming (2024) The determinants and consequences of performance commitment contracts in M&As. PhD thesis, Birkbeck, University of London.

Abstract

Earnouts and PCCs are considered as value-creation signals because of their roles in addressing information asymmetry and retaining target management teams. However, the economic outcomes of such contracts deeply rely on the quality of legal system in a country because the litigation risks related to earnouts and PCCs are quite high. The long-term consequences of such contracts used in emerging markets have been overlooked in existing literature. To fill these gaps, this PhD thesis explores the determinants and consequences of PCCs and earnouts in China from different theoretical perspectives. This thesis consists of three studies. The first examines the effects of PCCs and earnouts on acquiring firm post-M&A stock performances. In line with agency theory, this study shows that PCCs impair acquirers' buy-and-hold-abnormal-returns (BHARs) due to the agency issues between acquirer shareholders and target owner-managers. Acquirer monitoring helps alleviate the agency issues, but acquirers only solve such agency issues when they engage in bonding activities. Since PCCs usually impair acquirers’ interests, why do many acquirers still sign such contracts in M&As? In line with the expropriation hypothesis, the second study shows that PCCs are more likely to be used when the agency issue between acquirer controlling and minority shareholders is more serious, resulting in the wealth losses of acquirer minority shareholders. Furthermore, both acquirers’ cumulative abnormal returns (CARs) and BHARs are lower when PCCs are used for multiple times. The third study focuses on the roles of directors with foreign experience. In line with imprinting theory and learning theory, this study reports that returnee directors are associated with lower probabilities of insiders’ self-serving related-party M&As and signing PCCs. However, such directors could affect M&A decisions only when they are independent directors, reach a critical mass at the board, and their experience originates from countries with strong investor protection.

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