Valuation adjustment mechanisms and acquirer’s innovation under the new company law reform: Evidence from China

Abstract

The new Company Law has outlined the fundamental principles governing valuation adjustment mechanisms (VAMs), making conditions stricter and responsibilities more clearly defined. Using data on VAMs signed in mergers and acquisitions (M&As) of China's A-share market from 2010 to 2023, we find that VAMs negatively affect both the quantity and quality of acquirer innovation. These results remain robust across various tests, including double machine learning approaches. The negative effect stems from short-term profit targets imposed by VAMs, which encourage managers to cut R&D spending to boost accounting profits. At the same time, weak governance allows controlling shareholders to divert resources through equity pledges and tunnelling, further constraining innovation. Further analysis shows that the implementation of the new Company Law has significantly improved corporate governance by systematically clarifying the validity and enforcement conditions of VAMs.