Cross-border M&As: The impact of cultural friction and CEO change on the performance of acquired companies

This study analyzes the impact of cross-border mergers and acquisitions (M&As) on the performance of target firms. Based on institutional theory, we hypothesize that performance deteriorates because of a lack of legitimacy, particularly when there is friction between the two national cultures and a higher risk of clashes between organizational cultures. We test our assumptions using an original dataset to compare the performance of Italian firms involved in inward cross-border M&As with that of continuing local firms that have a similar ex-ante likelihood of being merged or acquired. We apply coarsened exact matching (CEM) to establish the control group and a difference-in-differences (DID) approach to account for the possibility that target companies produce superior results simply because foreign investors “cherry-pick” the best-performing firms. Contrary to predictions, we find that foreign ownership does not deteriorate growth but enhances the profitability of target firms compared to purely domestic companies. In addition, we illustrate that the latter result remains applicable when cultural frictions between national cultures are high and when the CEO of the target company is replaced or joined by a new CEO after the deal.     

Curvilinear relationship between cultural distance and equity participation: An empirical analysis of cross-border acquisitions

We examine the relationship between national cultural distance and equity participation using an analysis of a sample of more than 100,000 cross-border acquisitions from 1976 to 2008. We find that cultural distance has a curvilinear (U shaped) relationship with equity participation: Acquiring firms make large equity acquisitions at both low and high cultural distances and small equity acquisitions at moderate cultural distances. In addition, we find that industry relatedness of acquisitions positively moderates the relationship between cultural distance and equity participation: Acquiring firms take a higher equity stake for a given cultural distance if the acquisitions are in a related industry. Our findings offer important insights into firms' market entry behavior and provide guidelines for managers about entry strategies.     

When are acquisitions a viable catch-up strategy? Some empirical evidence from China

How emerging-market firms can catch up with forerunners from advanced economies is a key issue in the economic and technology literature. Research has suggested that acquisitions are a viable tool for firms in emerging markets to reduce the productivity gap with global leaders, but the empirical evidence on this matter is still far from conclusive. Contributing to this debate, this paper examines the impact of cross-border vs. domestic acquisitions on the labor productivity of firms across different sectoral environments. Studying the acquisitions pursued by Chinese listed firms over one decade, we find that cross-border acquisitions are positively associated with firms' labor productivity and that this effect is particularly strong in high-tech sectors and among leading firms. We also find that domestic acquisitions are positively associated with firms’ labor productivity and that this effect is particularly strong in low-tech sectors and among laggards. We further investigate the mechanisms underlying the acquisition–productivity link and contend that “technological innovation” is the primary mechanism by which acquisitions enhance firm productivity in high-tech sectors, whereas “enhancing operating efficiency” is the primary mechanism by which acquisitions enhance firm productivity in low-tech sectors.     

The triggers of local and distant search: Relative magnitude and persistence in explaining acquisition relatedness

Research on problemistic search has assumed negative attainment discrepancy to be the trigger of both local and distant search. Extending this research, we present and compare two additional triggers: (1) relative attainment discrepancy, which reflects how much a firm's attainment discrepancy deviates from its past negative attainment discrepancies; and (2) persistent attainment discrepancy, which reflects how often the firm experiences below-aspirations performance. Our triggers for distant search model a behavioral explanation for the timing and relatedness of acquisitions. We find support for baseline arguments of problemistic search whereby firms increase both industry- and skill-related acquisitions when they perform below aspirations. When they persistently perform below aspirations, however, this likelihood is reduced and firms engage in acquisitions that are more unrelated, thereby providing support for the notion of expanding search boundaries from local to distant search. Of the two triggers of distant search proposed, relative attainment discrepancy does not induce firms to expand search boundaries. Our results indicate that persistent attainment discrepancy is a key construct to consider when studying the expansion of search boundaries.     

Effects of Firm-specific and Country-specific Advantages on Relative Acquisition Size in Service Sector Cross-Border Acquisitions: An Empirical Examination

Using a sample of 348 service sector cross-border acquisitions by U.S. firms in 44 countries during 1990–2006, our study seeks to identify factors that influence relative acquisition size (acquisition transaction value as a percentage of acquiring firm's asset value). Our findings indicate that firm-specific advantages (FSAs) in the form of available financial slack and target industry knowledge were positively associated with relative acquisition size. However, contrary to expectations, we observed a negative relationship between cross-border acquisition experience and relative acquisition size. In addition, our results suggest that country-specific advantages (CSAs) associated with higher market potential, lower political risk, and greater cultural similarity contributed to increased relative acquisition size in service industry cross-border acquisitions. Finally, our analysis reveals that the relationship between available financial slack and relative acquisition size is contingent on cultural similarity with the relationship being more pronounced when cultural similarity is high.     

On micro-foundations of dynamic capabilities: A multi-level perspective based on CEO personality and knowledge-based capital

In recent years, researchers have asked why some firms are better than others at developing dynamic capabilities. The existing literature assesses micro-foundations separately, either on the managerial or on the organizational level. This study aims to provide a more holistic picture on the antecedents of dynamic capabilities by integrating managerial and organizational micro-foundations. Specifically, we posit that the personality of Chief Executive Officers (CEOs), manifested through their core self-evaluation (CSE), represents an individual-level micro-foundation which influences three types of a firm's knowledge-based capital—human, social, and organizational capital. We also argue that these three, in turn, are organization-level micro-foundations that ultimately enable the development of a firm's dynamic capabilities. We test our multi-level framework using data from 307 German CEOs, and confirm that CEO CSE is positively related with all three forms of knowledge-based capital. We further find that human capital and organizational capital mediate the relationship between a CEO's CSE and a firm's dynamic capabilities. Our research contributes by extending a central framework of the micro-foundations project (the bathtub model) that integrates the upper echelons perspective into a multi-level analysis. We empirically validate this model and advance the understanding of how firm leaders indirectly influence firm dynamic capabilities by shaping individual learning conditions.     

Top management departures in cross-border acquisitions: Governance issues in an international context

This study examined top management team departures in U.S. manufacturing firms acquired by a foreign multinational during the six-year period following acquisition. Results indicated that greater cultural distance between the United States and the home country of the foreign multinational, higher levels of international integration in the target industry, and poor preacquisition performance in the U.S. target company were related to greater postacquisition top management departures. These effects were moderated significantly by the foreign acquirer’s international business and U.S. acquisition experience and showed different patterns over the short-term, intermediate-term, and long-term. Implications for future research on top management teams involved in cross-border acquisitions are discussed.     

An organizational learning approach to digital and non-digital firm acquisition behavior

Drawing on organizational learning theory, this study investigates whether, and how, digital firms' characteristics can alter the determinants of exploration and exploitation activities through acquisitions. Considering that digital firms intrinsically differ from non-digital firms as regards their resource bundles, cost structure, and growth strategy, we argue that these distinctive characteristics can moderate the effects of slack resources and performance feedback on the propensity to conduct explorative and exploitative acquisitions. Comparing large, U.S. publicly traded digital and non-digital acquiring firms, we empirically show that consistent with our predictions, digital firms' characteristics mitigate the effects of slack resources and performance feedback on the propensity to conduct explorative acquisitions. Yet, contrary to our predictions, the findings also indicate that digital firms' characteristics reinforce the effects of these determinants on the propensity to conduct exploitative acquisitions.     

Dual class shares,board of directors’ effectiveness and firm’s market value: an empirical study

This study aims to identify whether a relationship exists between the controlling shareholders’ voting power and outside directors’ effectiveness in maximizing firms’ financial performance. We analyze a panel data with 3057 observations for the 2000–2012 period using a random effects model, logit and probit regressions, and the two-stage model of Heckman in the Brazilian stock market. Our findings show that firms whose controlling shareholders use dual class shares to leverage their voting power have less independence from the board and worse financial performance and market value. Further, the percentage of outside directors tends to be ineffective in increasing the firm’s value, and in changing the firm’s chief executive officer (CEO) when (1) the controlling shareholder’s voting power is leveraged, or (2) when the CEO assumes a position on the board of directors simultaneously. We interpreted that these results are in line with the arguments in favor of the existence of a new agency cost, which is related to the undue obedience of board members to authority, such as the largest controlling shareholder or the CEO in Brazilian listed firms.     

The double-edged sword of CEO/chairperson duality in corporatized state-owned firms: evidence from top management turnover in China

This study examines how board leadership structure (CEO duality) affects the corporate governance of corporatized state-owned firms where the state shareholders use these firms to serve both profit and non-profit objectives. We propose that CEO duality will generate a positive (negative) significant impact on the firms’ corporate governance when state owners tend to monitor their CEOs on the basis of profit (non-profit) considerations. We test our hypotheses by examining the relations between CEO duality and CEO turnover in Chinese listed companies that are ultimately controlled by central or local governments. We find that CEO duality is negatively related to turnover in marginal profit-making firms where turnover would be value-enhancing. This suggests that CEO duality is detrimental to these firms’ corporate governance because it entrenches relatively poorly performing CEOs. Duality is also negatively related to turnover in high-profitability firms where turnover would be non-value-enhancing. This suggests that CEO duality might positively contribute to the corporate governance of these firms by reducing the occurrence of non-value enhancing turnover. Overall, our study suggests that CEO duality is a double-edged sword in corporatized state-owned firms.     

Do CEOs exercise managerial discretion to save their jobs?

Chief Executive Officers (CEOs) wield considerable power and authority. In many industries and contexts, CEO turnover is studied in terms of antecedents, the event itself, and the related consequences. However, the extent to which CEOs exert their power and attempt to prevent their dismissal has not been thoroughly examined. In this study, we examine the role of CEOs exercising managerial discretion in their effort to prevent their own corporate demise. We hypothesize that CEOs cut discretionary expenses such as research and development, advertising, and rent in order to boost earnings and enhance financial performance. A sample of CEO turnover from Standard and Poor’s ExecComp database for the period 1992–1998 in US firms yielded 474 turnover firms and 2,066 control firm-years. We tested the effects of CEO turnover and managerial discretion on firm performance measured by cumulative abnormal stock returns. We also compared the turnover and non-turnover firms in terms of pattern of discretionary spending prior to CEO turnover. The results are consistent with our prediction that CEOs facing termination attempt to post higher earnings by reducing discretionary spending after controlling for firm performance, firm diversification, book to market ratio, and CEO ownership, industry-, and year dummies.     

Complex technological capabilities in emerging economy firms: The role of organizational relationships

Formal organizational relationships are important sources for capability building in emerging economy firms eager to move up the value chain. We examine how access to valuable knowledge available to firms via organizational relationships creates learning opportunities necessary for the development of complex technological capabilities. Using a sample of 852 observations of emerging economy firms from the Indian software industry between 1992 and 2000, we find that developing strong domestic intra-organizational relationships, through affiliation with a moderately diversified business group or operating in a related industry, promote more complex technological capabilities. In the case of foreign inter-organizational relationships, we find that greater foreign client contact enhances the complexity of firm technological capabilities. However, accessing knowledge from domestic inter-organizational relationships appears to hinder the development of firm complex technological capabilities. An interesting result from our research was that having greater access to knowledge from foreign intra-organizational relationships, embedded within foreign subsidiaries, did not lead to the development of complex firm technological capabilities. The results of our study highlight that for emerging economy firms wanting to improve their complex technological capabilities, there may be diminishing benefits to learning from and acquiring knowledge available within specific types of formal organizational relationships.     

The influence of CEO equity incentives on licensing

In a study of life science firms, we find that, in accordance with predictions drawn from agency theory and behavioral agency theory, CEO stock ownership is negatively associated with licensing while CEO stock options are positively associated with licensing. Furthermore, by combining theoretical insights from the capabilities literature with both agency theory and behavioral agency theory, we predict that a key measure of capabilities in the licensing context—a firm's alliance experience—significantly influences the ways in which CEO equity incentives impact licensing. More specifically, we find that, in accordance with our theoretical predictions, alliance experience positively (negatively) moderates the relationship between CEO stock ownership (CEO stock options) and licensing. Our study contributes to the wider literature on the determinants of licensing by examining whether licensing is sensitive to CEO equity incentives. We also extend the capabilities literature on licensing by examining the contrasting influences of a firm's alliance experience on the relationship between CEO equity incentives and licensing. Our findings also inform behavioral agency-based research on the effects of equity incentives by highlighting the usefulness of a capabilities perspective in augmenting our understanding of the behavioral role of CEO equity incentives.     

Gaining from the global ambitions of emerging economy enterprises: An analysis of the decision to sell a German firm to a Chinese acquirer

This paper examines the issue of cross-border acquisitions by companies from emerging economies in industrialised countries: an important phenomenon that has recently found increasing emphasis in international business research. In analysing Chinese acquisitions of German firms in the machinery and equipment industry, the paper addresses the question of why firms from industrialised countries are sold to companies from emerging economies. Several real and imagined reasons may induce the German side not to sell; nevertheless, this type of acquisition occurs with increasing frequency. Using case study evidence and interview data, the study finds explanations for the decision to sell to a Chinese company. The results show that German firms can gain substantially from the global ambitions of the Chinese firms for advancement of their own business objectives. This is due to complementarities in the motivations for engaging in the deals, as well as the underlying strategic needs of both firms. In addition, the specific nature of the cooperation between both firms instils in the German managers a sense of control and security—either real or merely perceived—creating conditions that are favourable to the selling decision. Most importantly, in the context of emerging economy enterprises acquiring advanced economy firms, motivations on both sides of the acquisitions appear to go beyond the commonly known goals such as capital transfer and additional market access, as the acquisitions provide the companies involved with conditions favourable to expansion into previously inaccessible market segments. The findings of this study provide useful guidance for the development of future strategic relationships between firms from industrialised and emerging economies.     

Do Compensation Consultants Drive Up CEO Pay? Evidence from UK Public Firms

Do compensation consultants drive up CEO pay for the benefit of managers, or do they design pay packages to benefit firm owners? Using a large sample of UK firms from the FTSE All‐Share Index over the 2003–2011 period, we show a positive correlation between the presence of compensation consultants and CEO pay. Importantly, isolating this effect is somewhat dependent on the endogenous selection of consultants and the statistical modelling strategy deployed. We find evidence that compensation consultants improve CEO compensation design when their expertise is of greater importance (e.g. during the post‐financial crisis period, or for firms that have particularly weak compensation policies). In addition, our findings show that compensation consultants increase CEO pay–performance sensitivity. The balance of evidence supports optimal contracting theory more than managerial power theory, but the authors caution the limits to this verification. We are careful to note that the more compelling evidence for the positive effect of pay consultants on CEOs is based on advanced methods (such as propensity score matching and difference‐in‐differences), and that more standard approaches (such as OLS and fixed effects) are unlikely to reveal the same level of causality of consultants on CEO pay.     

Industrial Origin of CEOs in Outside Succession: Board Preference and Stockholder Reaction

Although scholars have studied outside executive succession for decades, there is still no clear definition of the term outsider. We focus on a new dimension of outsiderness, the industrial background of executives hired from outside the firm into a CEO position. This paper examines the antecedents of boards' decisions on the industry origin of outside successors as well as the short-term stock market response. We find that firms with more independent boards and with blockholders owning large amounts of stock are more likely to hire industry unrelated successors. However, the board's decision does not strictly follow the rhetoric of stockholder's interests. The stock market reacts more positively to outside CEO succession announcements when the CEO comes from an industry related firm. These findings support our theoretical arguments that the boards of directors may use a logic or rule of appropriateness in deciding the industrial origin of outside successors.     

Cross-border mergers and the cross-border effect: the case of the automotive supply industry

In this paper we examine stock price reactions to cross-border mergers and acquisitions in a particular industry, the automotive supply industry. We show that cross-border transactions entail a pronounced value creation for the acquiring shareholders and that this value creation also holds for transcontinental transactions, which to our knowledge have not been investigated so far. Splitting the sample by different types of targets indicates that the value creation mainly stems from takeovers of subsidiaries. By examining differences between national and international takeovers in cross-section, we sustain the recent evidence of a negative cross-border effect (i.e., cross-border mergers and acquisitions entail lower announcement returns than national ones).

CEO political liberalism,stakeholders, and firms’ support for LGBT employees

We argue that CEO political liberalism, or the extent to which CEOs are more liberal rather than conservative, affects firms’ support for LGBT employees. Specifically, compared to conservative CEOs, liberal CEOs will be more likely to support LGBT employees by implementing LGBT-friendly policies. We furthermore posit that the presence of certain internal and external stakeholders—including boards, top management teams, and employees, as well as transient institutional investors and LGBT advocacy organizations—alter the proposed effect. Results based on a sample of Fortune 500 firms support our arguments. Our findings contribute to the literatures on leadership, stakeholders, and workplace diversity.     

Agency conflicts,executive compensation regulations and CEO pay-performance sensitivity: evidence from Sweden

Based on a unique country set up with concentrated ownership of firms, strong representation of major shareholders on boards and one of the highest percentages of firms with dual-class shares worldwide I study CEO pay-performance sensitivity in Swedish listed firms in the years 2001–2013. Focusing on Type II agency conflict, I find that that pay-performance sensitivity in family-controlled firms with family CEOs is significantly lower than in other types of firms, and that dual-class firms have significantly lower sensitivity of pay to accounting performance than non-dual-class firms. The results suggest that in firms with type II agency conflicts compensation practices may be driven either by family ties or by the power preferences of the controlling shareholder that uses compensation to align CEO’s interest with his/her will rather than with financial performance. The study also documents that the link between CEO pay and performance disappears in the 2010–2013 period following the implementation of the European Recommendations regarding executive compensation. This finding is in contrast to the stipulated goal of the European Commission, ‘to ensure pay for performance’ (European Commission 2009).     

Theoretical foundations of cross-border mergers and acquisitions: A review of current research and recommendations for the future

Cross-border mergers and acquisitions (M&As) have gained in popularity over the last decade. However, research on this type of diversification strategy has not kept pace with this trend. While there is considerable research in the area, it is unfortunately fragmented, leaving gaps that need to be addressed. Herein, we examine the theoretical perspectives and research findings on cross-border M&As from three perspectives: cross-border M&As as a (1) mode of entry in a foreign market, (2) dynamic learning process from a foreign culture, and (3) value-creating strategy. Current empirical research on this topic is also tabulated and grouped by theoretical stream to indicate major findings. Most importantly, we identify gaps in the literature and highlight five important research issues that provide directions for future research.