Performance commitment, earnings quality and tax avoidance: evidence from Chinese listed companies

Purpose This study aims to investigate the unintended consequences of performance commitment agreements in corporate acquisitions, with a specific focus on examining how these agreements influence the tax avoidance behavior of target firms in the Chinese market. Design/methodology/approach Based on data regarding listed companies in China from 2009 to 2020, this study employs a fixed-effects linear regression model to document the impact of the performance commitment of a target corporation on tax avoidance. Findings First, the degree of tax avoidance by target corporations is higher during the performance commitment period than during the non-commitment period. Second, corporations with heavier performance commitment pressure during the commitment period are more likely to avoid taxes. Third, performance commitments and performance commitment pressure can spur tax avoidance by reducing earnings quality. Fourth, compared with stock compensation, when the target corporation uses cash as compensation, it is more likely to engage in tax avoidance. Originality/value Our study confirms that the outcomes of performance commitment agreements may deviate from their original design intent. While these agreements reduce the acquirers’ adverse selection risk, they simultaneously increase the moral hazard faced by the acquirer, particularly concerning tax risks from the target company.