Performance commitment in M&As and stock price crash risk

ABSTRACT This paper investigates the impact of performance commitment in M&A transactions on acquiring firms’ future crash risk. We find a positive relation between performance commitment and acquiring firms’ future crash risk, and this result is more pronounced in related-party M&A deals. These findings are consistent with our prediction that performance commitment regulation may bring about negative consequences by providing the parties with private information an opportunity to overstate the values of inferior target assets; the stock price will suddenly drop when the accumulated hidden bad news release to the market. We further systematically discuss the shortcomings in the theories and regulation related to performance commitment in M&As. We document that the current performance commitment contract is designed as a costless promise with low default cost, resulting in the information insiders make use of the regulation loopholes to aggressively expropriate from less-informed minority shareholders.