Contingent cash crunch: How do performance commitments affect acquirer liquidity?

Abstract

This paper investigates how performance commitment clauses in mergers and acquisitions (M&As) influence the corporate liquidity of acquiring firms. Using a comprehensive dataset of Chinese domestic M&A deals from 2008 to 2021, we find that acquisitions involving performance commitments correspond to lower corporate liquidity for acquirers in subsequent years. Difference-in-differences analysis, instrumental variables, and propensity score matching support a causal relationship. Furthermore, cross-sectional tests reveal that this negative association is amplified for nonstate ownership, weak governance, poor reporting quality, and low financial constraints. We find that performance commitments increase management optimism, providing insights into the mechanisms linking contingent deal structures with suboptimal liquidity policies and heightened financial distress. Our study suggests that the contingent contract structures in M&A deals drain corporate liquidity, leaving firms financially vulnerable.