Accounting conservatism and the fulfilment of the target’s performance commitment in valuation adjustment mechanism contracts

Shiyun Zeng, Wenfei Li and Qingquan Tang

Asia-Pacific Journal of Accounting & Economics, 2022, vol. 29, issue 6, 1497-1517

Abstract: We find that acquiring firm’s accounting conservatism positively affects the likelihood of targets fulfilling their performance commitments in valuation adjustment mechanism (VAM) contracts in merger and acquisition (M&A) deals. The effect is more pronounced when the acquirer is in a high-competition industry and audited by non-Top eight accounting firms and the deal is cross-region. Further tests show that accounting conservatism increases the likelihood of fulfilment by lowering the targets’ promised standards and increasing managers’ incentive to motivate and monitor targets’ managers after M&A. Finally, the performance of conservative acquirers is better after VAM contract expires.

Date: 2022
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DOI: 10.1080/16081625.2020.1828951

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Asia-Pacific Journal of Accounting & Economics is currently edited by Yin-Wong Cheung, Hong Hwang, Jeong-Bon Kim, Shu-Hsing Li and Suresh Radhakrishnan

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