Accounting conservatism and the fulfilment of the target's performance commitment in valuation adjustment mechanism contracts. Issue 6 (2nd November 2022)

• Record Type: Journal Article
• Authors: Zeng, Shiyun; Li, Wenfei; Tang, Qingquan
• Is Part Of: Asia-Pacific journal of accounting & economics. Volume 29:Issue 6(2022)
• Page Start: 1497
• Page End: 1517
• Publication Date: 2022-11-02
• Subjects: Accounting conservatism -- fulfilment of the target's performance commitment -- valuation adjustment mechanism contracts -- M&A; Accounting -- Periodicals; Accounting -- Pacific Area -- Periodicals; Economics -- Periodicals; Pacific Area -- Economic conditions -- Periodicals; 657
• DOI: 10.1080/16081625.2020.1828951
• Languages: English
• ISSNs: 1608-1625

Abstract

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.