An Empirical Study Of The Impact Of Performance Commitment On Goodwill And Its Value Relevance

With the rise of a new wave of mergers and acquisitions,M&A transactions in China's capital market is growing,showing the three-high characteristics,which is high performance commitment,high valuation and high goodwill.Nowadays,the performance commitment agreement has become the practice in M&A transactions.The original intention of the institution is to curb the goodwill overestimation bubble and improve the synergy effect of M&A.However,due to the incomplete information disclosure and manipulability,the performance commitment has become a booster for the goodwill.High performance commitment boosted high valuation,then the high valuation led to high premium rate,which finally generated high goodwill.The huge value of goodwill was full of risk.Once the impairment decision has been made,it would influence the performance of the company.Even just a goodwill impairment could change the profit to the loss.At the same time,goodwill accounting,due to its own complexity and controversy,was still being constantly improving and developing.Therefore,the value relevance of goodwill has always been concerned.Whether the book value of goodwill which presented on the financial statements reflected its true value,and whether goodwill could bring expected excess returns to the enterprise.The reform of the goodwill standard is going on,and the implementation of performance commitments in practice was becoming more complex.In this context,it was extremely important to study the impact of performance commitment on goodwill and its value relevance.This paper firstly reviewed the literature and theory about performance commitment,goodwill and its value relevance.Based on the theoretical analysis,this paper put forward the hypothesis and conducted the empirical research.The conclusions were as follows: the existence of performance commitment in the M&A transaction would make the confirmed value of goodwill higher;the goodwill recognized in the financial statements was value relevant;the performance commitment reduced the value relevance of goodwill,specifically the achievement of the commitment,especially to an accuracy of 5% has reduced the value relevance of goodwill.Finally,this paper put forward some suggestions about the goodwill and its impairment,performance commitment institution and information disclosure,then pointed out the limitation and research outlook of this paper.