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Relative Performance Evaluation and Mergers and Acquisitions: Theory and Empirical Evidence
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TitleRelative Performance Evaluation and Mergers and Acquisitions: Theory and Empirical Evidence  
AuthorLi Guangzhong, Li Jie, Zhu Jiaqing and Li Xinchuna  
OrganizationBusiness School, Sun Yat-Sen University; Institute of Industrial Economics, Jinan University;;; 
Key WordsExecutive compensation; Relative performance evaluation; Merger and acquisitions; Corporate governance 
AbstractWe develop an oligopolistic model to investigate the impact of relative performance evaluation (RPE) on firms’ mergers and acquisitions (M&As). We find that ceteris paribus, strengthening RPE lowers the probability of corporate M&As, but an increase in market competitiveness will attenuate this effect. Moreover, the Difference-in-Difference estimation results show that the executive compensation reforms of Chinese state-owned enterprises (SOEs) in 2006 and 2008, which emphasize the importance of RPE, lower the probability of conducting M&A activities for SOEs. Market competition will attenuate the negative effect of RPE on M&A activities for SOEs. We also find that the introduction of option-based executive compensation reduces the negative effect of RPE on corporate M&As. Our research has important implications for the potential economic consequences of RPE adoption in the executive compensation design in Chinese state-owned enterprises. 
Serial NumberWP1346 
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