The Reasons For Failures Of Applying Valuation-adjustment-mechanism In China

Referring to the results of previous studies and combining theoretical analysis andcase analysis, this article attempts to research the reason behind the phenomenon that alarge proportion of domestic enterprises which signed the VAM did not reach the agreedstandards. Through illustrating large numbers of failures and summarizing the commoncharacteristics, we found that the type of agreed standard is not reasonable, the agreedstandard set too high, and the contract terms set imbalance. It is obviously that the interestof contract bias investment institutions so that the financing enterprises are facing hugerisk of failure. However, why financier is still choose to sign such a risky contract? Thispaper will discuss this question by placing the investor and financier within the frameworkof principal-agency theory and then separately analyzing their expected utility andbehavior choice. Finally, we found two main reasons for financing enterprises acceptingunreasonable VAM. Firstly, the management is excessively optimistic to the futureperformance of the enterprise. Secondly, enterprise in growth period is lack of the sourceof finance in China.There are two innovations. Firstly, the reasons of failure in VAM are divided into twoaspects, direct reason and underlying reason. Unlike many domestic articles whichconsider unreasonable contract terms as the main cause of the failure, here we maintainthat terms are set by people, so imbalance of terms themselves is not the underlying reason,but the surface cause of direct reason. Secondly, we use the main points of principal-agency theory to analyze the terms of contract, the process of signing and the reasons offailure in VAM.