M & A Compensation Commitment And Goodwill Impairments

In recent years,due to the further simplification of the administrative license of M&A in China,more and more listed companies choose mergers and acquisitions,therefore the amount of goodwill in the A-share market is also rising rapidly.According to statistics,the total amount of goodwill of A-share listed companies in China has increased from 169.02 billion yuan in 2012 to 1302.414 billion yuan at the end of 2017,with an average compound annual growth rate of 50.42%,which can not be underestimated.However,with the rapid expansion of the scale of goodwill,the listed companies began to frequently have a large amount of goodwill impairment,which led to a significant decline in the operating performance of many listed companies,resulting in severe shocks in the stock market,which also caused widespread concern among scholars.Academics generally believe that the main reason for this phenomenon is that the premium and valuation in M&A is so high that makes the value of goodwill inflated.And when the expected synergy effect can not be achieved in the later stage of mergers and acquisitions,listed companies have to calculate a huge amount of goodwill impairment.As an important clause of M & A agreement,compensation commitment was initially established to alleviate the information asymmetry between the two sides of M & A transactions.Through the prediction of target company's performance in the next few years and the design of compensation mechanism when target company fails to meet the commitment,it can not only provide strong data support for the estimation of transaction price,but also restrain or motivate the management of target company.However,with the further implementation of the system,the compensation commitment in M & A fails to play its positive role that make the transaction price of M & A return to its true value.Moreover,it gives the acquired party an incentive to raise the transaction price by means of higher performance commitment,which makes the listed company pay too high premium for M & A and the premium eventually transforms into a large amount of goodwill on balance sheet.Based on the above considerations,this study finds that it is necessary to study the impact on goodwill impairment from the perspective of compensation commitment in M & A,which can not only supplement the literature on the economic consequences of the compensation commitment,but also provide empirical evidences for the regulatory authorities to optimize the compensation commitment in M & A.Because there is a big difference between Compensation Commitment and Earnouts,this study mainly refers to the previous research of domestic scholars.Through the analysis of the current situation of the implementation of compensation commitment in M & A in China,this study finally chooses the material assets reorganization events of A-share listed companies from 2008 to 2017 as a sample to empirically test the impact of compensation commitment on goodwill impairment,and explores this impact furtherly when the acquirer is non-state-owned or its management is overconfident.We find that the listed companies which sign the compensation commitment agreement are more likely to face goodwill impairment and have a lager amount of goodwill impairment.The conclusion is still valid after a series of robust tests such as PSM and Heckman two-stage.Moreover,the effect of compensation commitment on goodwill impairment is more significant when the acquirer is non-state-owned or its management is overconfident.Further research shows that the failure to fulfill the compensation commitment will increase the probability of goodwill impairment,and the higher the average growth rate of promised performance,the more likely goodwill impairment will occur.This study not only enriches the literature on the economic consequences of compensation commitments,as well as the research of goodwill impairment factors from the institutional level,but also provides empirical evidence for regulatory authorities to optimize compensation commitment system and strengthen the disclosure of goodwill risk.Finally,based on the research conclusions,this study also puts forward some suggestions: for the regulatory authorities,it is hoped that the authorities could advocate compensation methods based on stock compensation or valuation compensation,strengthen the responsibility implementation system of financial intermediaries,and strengthen the disclosure of risk-oriented compensation commitments.For the listed companies,it is good to pay more attention to the long-term financial indicators of the target company.These suggestions will provide a reference for the authorities to promote the healthy and orderly development of the M & A market in our country.