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

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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.

Original languageEnglish
Pages (from-to)1645-1668
Number of pages24
JournalEuropean Journal of Finance
Volume27
Issue number16
Early online date23 Mar 2021
DOIs
Publication statusPublished Online - 23 Mar 2021

Keywords

  • Valuation adjustment mechanism
  • contingent payment
  • contract design
  • mergers and acquisitions
  • takeovers

ASJC Scopus subject areas

  • Economics, Econometrics and Finance (miscellaneous)

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