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We find that acquiring firm’s accounting conservatism positively affects the likelihood of targets fulfilling their performance commitments in valuation adjustment mechanism (VAM) contracts in merger and acquisition (M&amp;A) deals. The effect is more pronounced when the acquirer is in a high-competition industry and audited by non-Top eight accounting firms and the deal is cross-region. Further tests show that accounting conservatism increases the likelihood of fulfilment by lowering the targets’ promised standards and increasing managers’ incentive to motivate and monitor targets’ managers after M&amp;A. Finally, the performance of conservative acquirers is better after VAM contract expires.

Accounting conservatism and the fulfilment of the target’s performance commitment in valuation adjustment mechanism contracts