A catering perspective of performance commitment-evidence from acquisitions in China

Di Song, Na Shen and Jun Su

Pacific-Basin Finance Journal, 2023, vol. 78, issue C

Abstract: Performance commitment (PC hereafter), as a mechanism to reduce information asymmetry, has been increasingly applied to the acquisitions and reorganizations of listed companies in China. This study uses catering theory to analyze PC. We propose that managers/controlling shareholders cater to the investors' preferences when deciding whether to adopt PC in acquisitions. PC adoption generates a higher abnormal return in the short run but a lower abnormal return in the long run. Managers/controlling shareholders are motivated to adopt PC to gain short-run benefits by selling stocks after PC's announcement. The study helps to deepen the understanding of performance commitment from a new perspective and contributes to the field of research that views managerial decisions as rational responses to investor sentiment. Our study shows the speculative short-termism effect of regulatory policy in the Chinese capital market, and managers/controlling shareholders capitalize on opportunities in the inefficient market via PC adoption.

Keywords: Performance commitment; Catering theory; Acquisitions; China; Investor sentiment (search for similar items in EconPapers)
JEL-codes: G34 G41 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:78:y:2023:i:c:s0927538x23000537

DOI: 10.1016/j.pacfin.2023.101987

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