Does contingent payment in M&As induce acquirers’ earnings management? Evidence from performance commitment

Abstract

We examine the impact of performance commitment, a contingent payment mechanism in M&As, on acquirers’ earnings management. We find that performance commitment induces a transmission of earnings management from targets to acquirers. Specifically, acquirers, especially those whose targets just meet the promised performance goals, increase both accrual-based and real earnings management after the commitment period expires. This effect is partially driven by targets’ earnings decline in the post-commitment period. In addition, this effect is attenuated by effective internal controls and high analysts following, but intensified by share pledging and aggressive commitment. Our findings imply the failure of performance commitment in investor protection.