Valuation Adjustment Mechanism of M&A and Acquirer's Expectation Management

Abstract

Abstract: This paper investigates the impact of valuation adjustment mechanism (VAM) on acquirer’s performance meeting or beating market expectation during the period of VAM as well as the mechanism underlying the impact. Unlike most of the existing VAM researches that focus on acquirees (constrained parties), this paper examines the impact of VAM on the performance of acquirers (protected parties). The research reveals a significant increase in the probability of acquirer meeting or surpassing analyst consensus earnings forecasts during the period of VAM. This may be attributed to the active management of performance expectations downward by acquirer during the period of VAM. Further analysis indicates that, prior to performance forecasts, there is no significant correlation between analyst consensus earnings forecasts and whether listed companies are involved in VAM. However, after performance forecasts, listed companies engaged in VAM experience a significant decline in analyst consensus earnings forecasts. During the period of VAM, acquirer’s meeting or beating market expectations triggers a more pronounced market reaction, providing insights into the motivations behind expectation management. Additionally, it is observed that this phenomenon is significantly attenuated in companies where corporate governance mechanisms effectively constrain managers. Lastly, the study finds that listed companies also tend to engage in earnings management operations during the period of VAM, but the extent of earnings management is limited and does not significantly impact whether their performance meets investor expectations. In conclusion, this study identifies a “spillover effect” of VAM on acquirers, where listed companies, as acquirers, compromise investor interests through expectation management. This finding theoretically addresses gaps in the existing research on VAM and expectation management, offering crucial insights for the development of effective investor protection systems in capital markets.

Key words: valuation adjustment mechanism of M&A, expectation of capital market, expectation management

Yang Shengzhi, Chen Qinyuan, Wang Hao. Valuation Adjustment Mechanism of M&A and Acquirer's Expectation Management[J]. Management Review, 2024, 36(11): 206-217.

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