Managerial Overconfidence and the Value Adjustment Mechanism

Using the M & A event of A-share listed companies from 2008 to 2013, which contains the value adjustment mechanism, as a sample, the paper is intended to explore the influence of managerial overconfidence on the performance growth rate and the relationship between the promise of profit growth rate and the performance of M & A. The results show that overconfident managers tend to accept higher performance growth rate, and this tendency is more obvious in private enterprises. The further study found that the higher the promise of profit growth rate, the better the performance of M & A., but when the overconfident manager makes a higher level of performance commitment, the market will react negatively. This mainly depends on the value adjustment mechanism to a certain extent, can alleviate the information asymmetry of both sides, and encourage the parties to participate in the process of integration after merger, but when overconfidence managers promise higher earnings growth, the investors tend to interpret it as manager’s shortsighted behavior of lack of awareness of market risk.


Introduction
In recent years, with the development and prosperity of the merger and acquisition market in our country, the M & A mode is constantly being innovated.As an innovative exploration of M & A model, the value adjustment mechanism is applied to an increasing number of M & A cases.The value adjustment mechanism refers to the process of significant company restructure, in which the major business and the target business reached an agreement to facilitate the success of the transaction.Specifically, the target business promises to the major business on the performance that the underlying asset will achieve in a period of time in the future, if the business performance promised by the target business fails to reach the expected target, certain cash or share compensation will be paid by the target business.
As an important contractual arrangement, the value adjustment mechanism theoretically can mitigate the information asymmetry existing in the M & A and effectively motivating the target company to actively participate in the M & A integration process.It can alleviate the information asymmetry and agency problems existing in the process of mergers and acquisitions so as to effectively protect the legitimate rights and interests of the main parties and protect the interests of small and medium-sized investors [1].However, during the actual operation of the system, there were problems of high performance commitment, high valuation and high default rate.The performance commitment of the acquired party often becomes the main basis for its asset pricing.The high commitment, high valuation and high default rate in the market are often blameworthy, which is the root cause that lies in the high performance commitment.This article attempts to start from the "three highs" problem and uses the behavioral finance perspective to explore the impact of management overconfidence on value adjustment mechanism and the economic consequences of high performance promises, so as to enrich the theoretical research on the value adjustment mechanism, and ultimately provide investors with a correct understanding of the value adjustment mechanism, and provide some reference for relevant departments to implement regulatory measures.

Managers' Overconfidence and the M & A
Due to the self-attribution bias, overconfident managers tend to recognize their own knowledge and skills more often and have higher expectations of their own environmental control.Billett and Qian (2008) discussed the history of mergers and acquisitions of individual managers and found that the market expected the earnings of the M & A transactions based on the management's acquisition history and further reflected the changes in the stock market prices [2].The article pointed out that the deviations from self-attribution will lead to management's overconfidence and the series of mergers and acquisitions implemented by overconfident managers.Finally, it will lead to the devaluation of the sharehold-

The Value Adjustment Mechanism
According to a case study, Gao Chuang et al. (2010) found that cash and equity all play an important role in protecting small and medium-sized investors in the selection of compensation methods.Among them, share buy-back is more effective than cash compensation in restraining large shareholders from carrying out high performance commitment and high valuation behavior, so as to effectively improve the performance of listed companies.Compared with the cash com-

The Relationship between Managerial Overconfidence and Commitment Performance Growth Rate
and ability.And will have higher expectations for their ability to control the environment [3].Malmendier and Tate (2008), overconfident managers overestimate the benefits of their dominant projects, thereby paying higher premiums to the target company, but causing a loss in the market profits of the major company.When studying the relationship between overconfidence and corporate risk taking [4].Yu Minggui (2013) pointed out that managers with overconfidence also have higher willingness to take risks, and the improvement of risk appetite is conducive to promoting the optimal allocation of corporate resources and ultimately to the promotion of enterprises value.
The cultural tradition of centralization of power in China that lasted for thousands of years, and the current emerging and transitional economic environment, have provided an objective basis for overconfidence managers.The imperfect laws and regulations, the corporate governance structure and the incomplete supervision system further encourage managers' overconfidence.In the major assets reorganization with performance compensation commitment, the more management overconfidence, the more likely it is to overestimate the project revenue and underestimate the project risk.Due to the high degree of recognition of their own decision-making, they are usually optimistic that they will be successful.Accordingly, this paper proposes the following assumptions: Hypothesis 1: Overconfidence managers tend to accept higher promised performance growth rates.

The Influence of Property Rights on the Relationship between Managerial Overconfidence and Commitment Performance Growth
State-owned listed companies are controlled by the state or local government.
Relative to private enterprises, state-owned listed companies may obtain more and more comprehensive information on mergers and acquisitions due to the inclination of more government resources.Based on this, SOE managers may prefer to make more stable M & A decision.Pan Hongbo (2008) pointed out: In our country, M & A activities can serve as a way for the government to ease the employment problem and achieve political promotion.Due to non-economic factors, management may pay more attention to the achievement of policy goals and discouragement rather than the improvement of enterprise efficiency in M & A decision-making.Accordingly, this paper proposes the following assumptions: Hypothesis 2: Overconfident managers of state-owned enterprises tend to accept a lower rate of promised performance growth than private-owned ones.

Signal Transmission of Commitment Performance Growth Rate
According to the signal theory, the stock price of the company will increase when the signals delivered by the insiders are "good news" (such as stock repurchase and dividend increase), and when the signals delivered by insiders are "bad news" (such as convertible bond redemption, re-issue), the stock price will Typically, a financial behavior has a signal function requires two conditions: The first, the behavior must be implementation cost; The second, the cost differences between good companies and bad companies, and a worse company bears higher costs.Performance commitment can be a signal because of the fact it has the cost of implementation, that is, the present value of the possible future compensation amount; on the other hand, the performance compensation commitment costs will be higher for poor quality companies.Therefore, the value adjustment mechanism can deliver the quality signal of target party, and also to some extent reflect the expected performance to its future profitability [5].When the parties are committed to a higher performance growth rate, they may send a positive forecast to the market for future M&A performance.Therefore, the following hypothesis is proposed: Hypothesis 3a: the higher the growth rate of the promised performance, the better the company's short-term market M&A performance.
As the basis of the asset pricing of acquisition targets, the value adjustment mechanism has two sides in the case of information asymmetry.On the one hand, it may be a well-expected future performance to be delivered to the market with the asset of good quality.In this case, both parties agree on the future profitability of the underlying asset; on the other hand, the growth rate of high promised performance may be an excessive risk appetite caused by the deviation of the principal and the side managers on their own abilities, and even the growth rate of the promised performance of the underlying enterprises in order to obtain the high M & A premium.May be reduced to the main and large shareholders and party conspiracy and conspiracy to emptied and undermine the interests of minority shareholders tools.
When non-overconfident managers accept a high growth rate of performance commitment, the market usually interprets it as a "good signal" that investors believe the promised performance at this time is a reflection of the real profitability of the underlying company and believes that through resources consolidation will yield positive performance; when overconfident managers accept higher performance commitment growth rate, the market usually interprets it as a "bad signal", that is, investors believe the performance growth promised by the subject party may be the result of CEO overestimating of their knowledge and ability and underestimating the project risk.Therefore, this paper proposes the following assumptions: Hypothesis 3b: The higher the increasing rate of commitment performance accepted by overconfident managers, the worse the company's short-term market Open Journal of Accounting merger performance is.

Sample Selection
This article chooses the M & A event that adopts the value adjustment mechanism in non-financial enterprises from 2008 to 2013 as the initial sample.Based on the initial sample, the following screening will be conducted: 1) Remove ST * and ST companies; 2) Remove samples that have not been audited or stopped by the CSRC; 3) Exclude samples with suspension period longer than 3 months before and after the merger announcement; 4) Exclude the acquisition of data samples cannot be obtained.
After the above screening, a total of 154 mergers and acquisitions with value adjustment mechanism were obtained.In the above data, data on value adjustment mechanism and underlying assets are collected manually from the corporate restructuring reports and interim announcements of each company, with the remaining data coming from the CSMAR and Wind databases.

Variable Design
1) Commitment Performance Growth Rate (GR) This article uses the geometric average annual net profit growth rate of the agreement terms as a measure of the growth rate of promised performance.If the net profit after deducting non recurring gains and losses of the target company in the next three years were 10,000, 50,000 and 100,000, the promised performance growth rate will be [(100000/10000)^(1/2) − 1].The geometric average growth rate is more consistent with the economic logic.For example, a variable increases from the initial 100 to 200 and finally down to 100, According to the arithmetic average, the average growth rate was 25%.Since the final value is equal to the initial value, the growth rate should apparently be 0%, which corresponds to the result obtained from the geometric mean.Therefore, in the calculation of the average growth rate of finance and economy, the geometric average dominates and the geometric average growth rate also accords with the assumption of compound interest growth in economic and financial theories.
2) Cumulative abnormal return (CAR) This article uses the market adjustment method to calculate abnormal earnings of the company and examines the share price performance of the acquiring company within 7 trading days from 3 trading days prior to the first announcement of performance compensation agreement to 3 trading days after the merger and acquisition.Assuming R i,t represents the daily yield of stock I on t day, R m,t represents the market yield of t Based on the methods of Yu Minggui (2013) and Jiang Wei (2010), this article attempts to use the general indicators composed of the general manager's gender, education, age, education background and the combination of director and general manager as the proxy variables of over-confident managers for the following specific reasons: a) Sex: Women are more cautious and conservative relative to men (Byrn et al., 1999) [6].Therefore, if the general manager is male, the value is 1, otherwise 0; b) Age: Senior age managers can evaluate their knowledge and ability more appropriately, and they are more inclined to avoid risks (Forbes, 2005) [7].Therefore, if the general manager's age is less than the sample's mean, the value is 1, otherwise 0; c) Education: Managers are more likely to show overconfidence when they have a higher level of education because they are more confident of the correctness of judgments based on their own knowledge and have higher expectations of their environmental control (Schrand and Zechman, 2008) [8].Therefore, if the general manager degree is bachelor degree or above, the value is 1, otherwise 0. d) Education Background: Ben-David et al.
2006 found that: managers with management education background may be more likely to believe their own risk control ability and ability to handle management affairs based on the management experience they possess.They may show a stronger tendency toward overconfidence [9].If the manager has a management education background, with a value of 1, otherwise 0. e) The combination of director and general manager: The general manager who serves as the chairman of the board, is more likely to show heightened self-confidence by strengthening his knowledge of his own abilities (Billett, M.T. & Qian, 2008) [2].Therefore, if the managing director serves as chairman, the value is 1, otherwise 0. This article measures managers' overconfidence through a comprehensive index determined by a single combination of managers.When managers have at least four of the above characteristics, they are defined as overconfidence, with an OC of 1, otherwise 0.
(4) the control variables (Control) This paper controls the following variables: capital structure:Lev (total liabilities/total assets), first shareholder's ownership: Shr1, the size of the company: Size (The natural logarithm of the asset), the connected transaction:GT (1 for a connected transaction, 0 otherwise), the nature of property right:State (1 for state-owned enterprises, 0 otherwise), excess cash holdings:FCF (the ratio of monetary funds to total assets less the industry average); Industry:Ind (dummy variable, industry classification according to SFC industry classification criteria, excluding financial and insurance sectors) and Year (dummy variable).

Empirical Model
To verify hypothesis 1, construct a model (1) to examine the impact of managers overconfidence on the performance growth rate of mergers and acquisitions: This article further verifies the impact of the performance growth rate of promises on the market performance of short-term M & A of listed companies, and builds the model: To verify the promised performance growth rate and managers overconfidence o on the short-term M & A market performance of listed companies, build the model:

Regression Analysis
1) The relationship between managerial overconfidence and commitment performance growth rate.This is consistent with the conclusion of Hypothesis 1 that overconfidence managers tend to accept higher promised performance growth rates.
2) The impact of property rights on the relationship between Managerial overconfidence and commitment performance growth rate.
The third column of Table 3 shows that after adding other control variables that affect the performance growth rate, the coefficients of overconfidence and property ownership are significantly negative at the level of 5%.It shows that in state-owned enterprises, overconfident managers can significantly reduce the growth rate of promised performance, which is in line with the conclusion of 3) The relationship between commitment performance growth rate and M & A performance.
The first column of Table 4 shows the regression results of the promised performance growth rate and M & A short-term market performance.Under the control of other trading characteristics, the coefficient of promised performance growth rate is 0.288, which is significantly positive at the level of 10%, which means that the higher the promised performance growth rate, the better the performance of short-term market M & A will be.This depends mainly on the value adjustment mechanism can convey the signal of the target company's quality to the market, and to a certain extent, it reflects the commitment level of the promised party for its future profitability.When the target company promises higher performance growth rates, it may be able to convey to the market a better expectation of the future performance about target company.
(4) Analysis of the regression result of committed performance growth and overconfidence in signal transmission.
The second column of Table 4 shows the regression results of the crossgrouping of manager overconfidence and promised performance growth on short-term market performance.The coefficient of overconfidence and commitment performance growth rate was significantly negative.This shows that er value.Fu Qiang and Fang Wenjun (2008), referring to the practice of Yu (2006), chose the business climate index published by the Bureau of Statistics as the proxy variable in measuring managers' overconfidence.The study found that overconfident managers tended to implement more frequent mergers and acquisitions.Wu Chaopeng, Wu Shinong and Zheng Fangkuo (2008) found that manager overconfidence will lead to a decline in the performance of a series of mergers and acquisitions; and when management can draw on effective experience from historical mergers and acquisitions, its dominant M & A performance F. Xu DOI: 10.4236/ojacct.2018.7100795 Open Journal of Accounting will gradually improve.Overall, domestic and foreign research found that overconfident managers will lead to higher frequency of mergers and acquisitions, higher M & A premium and lower M & A performance.
.4236/ojacct.2018.7100797Open Journal of Accounting fall.In research methods, the cumulative abnormal returns are generally used to measure the effect of signal transmission.This paper argues that in mergers and acquisitions, to determine the price is the process of bargaining by both parties, in which the key determinants of the consideration are the future performance of the underlying party's commitment and the promised performance is likely to be used to convey the relevant Company quality signal.

Table 1 .
Descriptive statistics of the main variables in this paper are shown in Table1.As can be seen from Table1, the mean of overconfidence (OC) is 0.318, indicating that 31.8% of executives in the sample data are overconfident and the mean of ΔROA is negative.This is in line with the current domestic and foreign research on M & A performance The conclusion is consistent: the merger and acquisition will lead to the devaluation of the main business entity; the average value of the State property is 0.258, indicating that 25.8% of the sample companies are stateowned enterprises; the average of the related-party transaction (GT) is 0.497, This shows that nearly half of the sample data is related mergers and acquisitions.Table2shows the correlation coefficient matrix of the major variables.From the table we can see that under the condition of not controlling other variables, Descriptive statistics.

Table 3 .
Managers Overconfidence and Commitment Performance of the regression results.Hypothesis 2 that overconfident managers of state-owned enterprises tend to accept a lower rate of promised performance growth than private-owned ones.

Table 4 .
Regression results of commitment performance growth and M & A performance.