Abstract:
As important instruments for advancing industrial integration, merger and acquisition (M&A) funds have played a positive role in improving the M&A performance of listed firms, enhancing investment and financing efficiency, and supporting corporate growth. Their complex transaction structures and tiered information disclosure, however, also expose firms to latent risks. Drawing on a sample of A-share firms listed on the Shanghai and Shenzhen stock exchanges and employing a staggered difference-in-differences model, this paper finds that the establishment of an M&A fund increases a firm's stock price tail risk. This effect is more pronounced among firms facing weaker financing constraints, firms with boards exhibiting greater risk tolerance, firms located in regions with weaker financial regulation, and firms whose M&A funds invest outside strategic emerging industries. Three mechanisms underlie this effect. First, M&A funds impair accounting information quality: complex transaction structures widen the scope for accounting discretion in valuing investment targets and recognizing gains and losses, while performance commitments and exit pressures strengthen managers' incentives to smooth earnings and defer the recognition of investment losses. Second, M&A funds weaken the quality of audit oversight: off-balance-sheet arrangements and multi-layered transaction chains make it harder for auditors to trace fund flows, identify related-party relationships, and assess valuation reasonableness, thereby eroding the disciplinary effect of external auditing on risk-concealing behavior. Third, M&A funds widen the channels for expropriation by controlling shareholders: they facilitate the participation of parties related to controlling shareholders in the capital operations of listed firms, render related-party disclosure more opaque, make tunneling more difficult to detect, and may shape the pricing of listed firms' assets through valuation arrangements, profit-distribution schemes, and exit provisions. To better harness the functions of M&A funds, we offer three recommendations. First, disclosure requirements for listed firms that establish or participate in M&A funds should be strengthened, with dynamic disclosure mandated for major investments, valuation adjustments, asset impairments, and exit progress over a fund's life. Second, the responsibilities of internal governance actors—including the board of directors, independent directors, and the audit committee—should be firmly established so as to prevent M&A funds from being used for related-party benefit arrangements and the deferral of risk exposure. Third, a differentiated risk-regulation regime should be established according to regional financial regulatory intensity, corporate governance quality, and the characteristics of the M&A fund, with more frequent inquiries, intensified targeted inspections, and closer supervision of information disclosure for high-risk firms.
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