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| The Crowding-out Effect of Precise Compliance of Performance Commitment on Corporate Innovation |
| Qiu Jinlong1,Li Xuebin1,Zhang Guozhen2 |
| (1.School of Management, Shandong University, Jinan 250100, China;2.College of Economics and Management, Taiyuan University of Technology, Taiyuan 030024, China) |
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Abstract Performance commitment is an important part of M&A transactions and is highly valued in both theoretical and practical circles. Although it can effectively reduce information asymmetry and improve the M&A performance of enterprises, it has negative effects. Managers may achieve performance commitments through earning management, which may lead to problems such as the deterioration of financial performance, a stock price crash, and goodwill impairment. At present, precise compliance with performance commitment is common in the capital market. To a certain extent, the precise compliance of the performance commitment implies that the target has difficulties in completing the agreed goals in the performance commitment. In order to reduce compensation, managers tend to allocate more attention and resources to fulfill the agreed goal. Resources are limited, and innovation activities need more talents, technologies and capital. When all the resources are allocated to the short-term financial performance agreed upon in the performance commitment, the long-term innovation will be crowded out.#br#According to goal-setting theory, different kinds of goals trigger different behaviors. Financial performance in the performance commitment is a short-term, clear, and easy-to-measure goal, while innovation is a relatively long-term, vague and difficult-to-measure goal, and there may be crowding-out effects among different goals. When the financial performance promised by enterprises is high, it imposes greater pressure on them. To fulfill short-term financial performance goals, managers are more likely to sacrifice the long-term goal. However, few studies focus on the impact of the precise compliance of performance commitment on corporate innovation. Thus, the paper intends to make up for this deficiency.#br#This paper takes the A-share backdoor listing events in China from 2013 to 2020 as the research sample to study the relationship between short-term, clear and easy-to-measure performance goals and relatively long-term, vague and difficult-to-measure innovation goals based on goal setting theory. The research results are as follows. (1) The precise compliance of performance commitment is significantly and negatively correlated with corporate innovation, indicating that the precise compliance of performance commitment has a crowding-out effect on corporate innovation. It means short-term, clear and easy-to-measure goals crowd out long-term, vague and difficult-to-measure goals. (2) Financial performance pressure can strengthen the crowding-out effect of precise compliance of performance commitment on corporate innovation. It would distract managers' efforts from long-term innovation by setting high-level performance commitment, thus hampering corporate innovation. (3) The crowding-out effect of precise compliance of performance commitment on corporate innovation varies in different situations. Compared with the lower committed performance growth rate, when the performance growth rate of commitment is higher, the crowding-out effect of precise compliance on corporate innovation is stronger. Compared with the first year of the commitment period, the precise compliance in the subsequent year has a stronger crowding-out effect. In terms of the enterprises' growth rate, compared with high-growth enterprises, low-growth enterprises face more financial constraints, and precise compliance has a more significant crowding-out effect. In terms of the nature of property rights, compared with the state-owned enterprises, the non-state-owned enterprises' precise compliance of performance commitment has a stronger crowding-out effect on innovation.#br#This study contributes to the present research on performance commitments' negative effects by studying the economic consequences of precise compliance of performance commitment from the perspective of innovation. It further expands the literature on the influencing factors of enterprise innovation decision-making. In addition, this study enriches and expands the application scope of goal setting theory, and clarifies the mechanism of the impact of precise compliance of performance commitment on innovation. The conclusion of the study not only helps regulators improve the supervision of the completion of performance commitment, but also advances investors' understanding of the economic consequences of precise compliance of performance commitment so as to make rational decisions. It also provides instructive guidance for enterprises when managers make decisions on innovation activities under the pressure of performance commitment.#br#
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Received: 20 April 2023
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