Research On The Impact Of Performance Commitment On The Executive Reductions Of Listed Companies

In recent years,under the market environment of China’s continuous promotion of industrial and industrial transformation and upgrading,many enterprises have regarded M&A as an important means to achieve their goals of transformation and development,expanding market share,and introducing high quality technical resources.With the increasing frequency of M&A activities in China’s capital market,performance commitment agreements are widely used as an M&A risk prevention and control mechanism,which was originally established to reduce information asymmetry between M&A parties and to protect the rights and interests of small and medium-sized investors.However,in reality,it seems that performance commitment has not become an umbrella to avoid M&A risks,and negative phenomena such as stock price collapse,reversal of performance and non-fulfillment of compensation agreement have occurred frequently after listed companies signed performance commitment.In addition,because China’s market supervision system is still not perfect,the executives of listed companies take advantage of internal information to reduce their holdings in the secondary market for arbitrage,while signing performance pledges usually sends positive signals to the market.This leads one to wonder whether listed companies sign performance pledges for the purpose of avoiding M&A risks or for self-interest motives,and whether executives in charge of M&A transactions will use performance pledges to push up share prices and cut their holdings for profits? The existing literature on performance commitments mainly focuses on M&A performance,goodwill impairment,etc.Few papers have discussed the issue from the perspective of executive share reduction,which will be the focus of this paper.Through review of the literature related to performance commitments and executive shareholding reduction,this paper theoretically analyzes the mechanism of the impact of performance commitments on executive shareholding reduction,and then proposes the research hypothesis of this paper.Taking the M&A events of A-share listed companies in Shanghai and Shenzhen from 2008 to 2018 as the research sample,this paper explores whether the signing of performance commitments by listed companies in M&A transactions promotes executive shareholding reduction,as well as the effects of the level of performance promise profits and the way of performance promise compensation on executive shareholding reduction behavior,and further analyzes the moderating effect of connected transactions on the relationship between performance promises and executive shareholding reduction.Secondly,this paper also explores the impact of the reduction behavior of executives of listed companies on their M&A performance after signing performance commitment agreements in terms of the economic consequences of the reduction of executives’ holdings.Through the empirical study,it is found that: first,executives of listed companies are more inclined to reduce their shareholdings after signing performance commitment and the percentage of reduction is higher,i.e.,in the event of M&A,there does exist the self-interest behavior of executives using the concept of performance commitment to boost the share price and thus reduce their holdings at a high level to obtain excess returns;second,the higher the level of performance commitment set in the terms of performance commitment,the higher the possibility of executives reducing their holdings and the percentage of reduction is higher.Thirdly,if the compensation method set in the performance commitment terms is cash compensation,the possibility of executives cutting their holdings is greater and the percentage of cutting their holdings is higher;fourthly,because of the increasingly strict regulation of connected transactions in China,compared with connected mergers and acquisitions,the percentage of executives cutting their holdings after signing performance commitments in unconnected mergers and acquisitions is higher;fifthly,after signing performance commitments,executives’ large-scale cutting behavior will lead to long-term market performance,which has little impact on the financial performance of listed companies.The core view of this paper is that the signing of performance commitments by listed companies in M&A may not be motivated by the avoidance of M&A risks,but may instead be a means for executives to push up share prices and reduce their holdings for profit,which seriously harms the interests of small and medium-sized investors.This conclusion makes a contribution to the improvement of laws and regulations related to the performance promise system and the regulation of insider trading by executives,and also helps protect small and medium-sized investors by helping them understand performance promises rationally and not to blindly rely on performance promises for investment decisions.