Risk and Incentive Analysis on Valuation Adjustment Mechanism: The Mergers and Acquisitions of A-Shares During 2018-2022

This paper examines the Value Adjustment Mechanism (VAM) for A-shares that announced Mergers and Acquisitions (M&As) during 2018-2022. It explores the relationship between the promised profit and the compensation method in the commitment agreement. The results suggest an inverted U-shape relationship, meaning that an appropriate increase in the growth rate of the target company can motivate management to achieve better performance. However, the incentive effect of this commitment performance declines after achieving an optimal level. When comparing to cash compensation, the incentive effect of equity compensation is more profound. In addition, it shows that low carbon efficient M&A has a higher opportunity achieving better performance commitments than its peers. However, due to presence of information asymmetry, earnings management, and related transactions between M&A, the inherent risk can reduce the incentive of the promised commitment. Consequently, the promised performance target might deviate from rational expectation.