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

XiaoGang Bi

The European Journal of Finance, 2021, vol. 27, issue 16, 1645-1668

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.

Date: 2021
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DOI: 10.1080/1351847X.2021.1903963

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