Decision making on doing a defensive acquisition during the later stage of a M&A-wave : the effect of firm-size and self-interest

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Decision making on doing a defensive acquisition during the later

stage of a M&A-wave: the effect of firm-size and self-interest.

Student Yves van Veen

Student number 10068481

Study Economics and Business

Specialization Finance and Organization Supervisor Maarten Pieter Schinkel

Abstract:

The aim of this paper is to examine the effect of firm-size and self-interest of a manager on making a managerial decision on doing a defensive acquisition during the later stage of a M&A-wave. The effects are tested by manipulating these factors in a questionnaire. A significant effect is found for managers to have a baseline attendance to acquire a competitive firm if by doing so they can avoid being. Also, a significant effect is found for self-interest for managers of a small-firm on the decision to do a defensive acquisition. No significant effect is found for the effect of firm-size on the decision to do a defensive acquisition.

Table of Content

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1. Introduction ………....……….. 3

2. Method and Data Analysis………....……… 7

2.1 Experimental Design………....………. 7

2.2 Data Analysis………. 11

3. Results ……… 14

3.1 Baseline Attendance to Acquire……… 14

3.2 The Effect of Firm-size……….. 14

3.3 The Effect of Self-interest……….. 15

3.4 Results of the Post-experimental Question……… 17

4. Discussion and Conclusion ……..………. 18

Reference List ………...…… 21

Appendix ………. 23

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1. Introduction

Mergers and acquisitions (M&A’s) seem to occur in high frequency during certain time periods; these periods are referred as M&A-waves (Golbe and White, 1993). Yearly, billions worth of assets are transferred between companies through M&A’s. Therefore it is very important to study these waves. There are several studies on the triggers and characteristics of M&A-waves. However, it still seems difficult to fully understand these waves.

In literature, there are various theories on explaining and characterizing M&A-waves. Waves are triggered by an industry-specific shock (Mitchell and Mulherin, 1996). This can be an economical, technological or regulatory shock. After a shock, a redistribution of capital, by a merger or acquisition, is a good way to rebalance the industry. M&A-waves cluster by industry because shocks are most of the times industry-specific shocks. There are 35 waves identified for the period 1981 to 2000 (Harford, 2005). In line with the theory of Mitchell and Mulherin, M&A-waves can for example be triggered by overvaluation of firms in an industry (Shleifer and Vishny, 2003). Using the overvalued stocks for financing M&A’s makes it easier to finance a merger or acquisition, which can lead to a wave.

One of the most important characteristics of M&A-waves is that the returns in the beginning of the wave are mainly positive, while returns are negative at the later stage of the wave (Bradley et al., 1988). From an efficient point of view it looks like an inefficient and therefore irrational action to acquire a firm when this investment has a negative return. There are some theories on why managers still decide to merge or acquire in the period of the wave when the returns are negative.

A possible explanation for this characteristic of M&A-waves is herding behaviour by managers (Scharfstein and Stein, 1990). This theory states that managers will be afraid to take different actions than competitors do. By herding the manager will copy the

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behaviour of his competitors. Accordingly, the manager will decide to acquire or merge with a firm, even though the investment will lead to a negative return.

From the perspective of the later stage of a M&A-wave there is trend of merging and acquiring in the industry. This means that there is a threat to firms in the industry to be a target of an acquisition. The probability of being acquired by a competitive firm

decreases with firm-size (Hasbrouck, 1995). Gorton et. al (2009) show that a M&A-wave can result in a race between companies for increasing firm-size. By acquiring another firm one can increase the size of their own firm, which makes it harder to be acquired. Motivations for a desire to keep the firm independent could for example be that there is uncertainty about the future of the firm and containing your job if you lose independence of the firm. Given that there is threat for firms that are smaller than their competitors to be a possible target for an acquisition and that during a M&A-wave there are more acquisitions than normal, the chance of being a target for an acquisition increases. Therefore we believe the effect of firm-size to be relative strong for given period on the decision to acquire a firm. Because the threat of being acquired decreases with firm-size, we predict that a smaller firm is more likely to act in defensive acquisition than a larger firm.

A factor that is also considered important for making a decision about a defensive

acquisition is self-interest of a manager. Managers with self-interest are more likely to act in a defensive acquisition, because they are likely to either have a subordinated role or lose their job when their firm gets acquired (Jensen and Ruback, 1983). Accordingly, a defensive acquisition is value reducing for shareholders but increases the chance of retaining the job of the manager of the acquiring firm. Managers whom act in their own interest will decide, from a certain point of risk of losing their job, to do a defensive acquisition to avoid losing control. By doing so they will value their own job more than the long-term existence of the firm. We predict that managers whom act in their own interest will decide, from a certain point of risk of losing their job, to do a defensive acquisition to avoid losing control.

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The aim of this paper is to test the effect of firm-size and the effect of self-interest of a manager when it comes to making a risky decision as merging or acquiring another firm during the later stage of the wave. More specifically, my research question is as follows: What is the influence of firm-size and self-interest on the decision to merge or acquire in a merger and acquisition wave, given that the merger or acquisition is non-profitable and there is a chance of being acquired itself? These two factors will be tested on their effects through a questionnaire.

Based on the literature, we predict the following two effects. First, we predict that a smaller firm is more likely to act in defensive acquisition than a larger firm, given that the merger or acquisition in long-term is non-profitable and there is a chance of being acquired itself. Second, we predict that a manager of a firm with self-interest is more likely to act in a defensive acquisition than a manager without self-interest, given that the manager is likely to lose his job in case of being acquired, the merger or acquisition in long-term is non-profitable and there is a chance of being acquired itself.

Both hypotheses include the following two conditions: 1) in case the firm decides to acquire a firm itself, the acquisition will have a negative long-term return, and 2) there is a chance of being acquired itself. These conditions are included to set-up a situation that as much is line with the characteristics of the later stage of M&A-waves as much as possible. The first condition follows from research that shows that most acquisitions, especially in-wave acquisitions, have a negative return in the long run for the acquirer (Duchin and Schmidt, 2013). Harford (2003) shows that the long-term return for the acquirer depends on whether it is financed with stocks or with cash. For simplification, we assume that in case a subject in our survey decides to acquire a firm, the long-term return of the acquisition for their own firm is negative. The second condition is included because the hypothesis can only be tested if there is a chance of being acquired itself. Namely, in case that there is no chance of being acquired by a competitor then there is no need to act in a defensive way because there is no threat to the firm or the manager. Both hypotheses have the described two conditions, because in this way we can test both the hypotheses in the same survey.

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In case of finding results in line with our first hypothesis we then can state that a manager of smaller firm is more likely to act in a defensive acquisition than manager of a larger firm. If we find results that confirm the second hypothesis then we can confirm that self-interest of a manager might be a possible explanation of, from firm-perspective, irrational managerial acquisition-decisions. Considering this, firms could avoid these situations by paying more attention to constructing pay-off systems and continuation contracts for managers whom have to make decisions about acquisitions that are not conflicting with managers’ self-interest.

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2. Method and Data Analysis

In this section we will explain the set-up of our experimental method. Also, we will discuss the main statistics of the data.

2.1 Experimental Design

A lot of research has been done on M&A’s by testing real data. By testing real data one is able to say something about effects and relations of variables observed in real time. The aim of this research is to see whether the findings of the behaviour of the subjects from the experiment are in line with the results of former research on real data.

The experimental research will be done in the form of a questionnaire1. The experiment has a between-within subject’s design. This means that participants are used only once to test their behaviour, but they will face situations with different conditions. For this study this means that participants are randomly assigned to being a manager of a small or a large firm. From that condition they will face situations with both with and without being a manager with self-interest and losing your job in case of being required. Table 1 shows an overview of the set-up of the experiment. Subjects are assigned to either group 1 or

group 2 (between-design). Subjects will face situations in both a and b (within-design).

The variables firm-size and self-interest will be manipulated by an introduction letter. The participant will read the introduction letter carefully.

Small firm Large firm

Manager has self-interest and loses his job in case the firm gets acquired

Group 1a Group 2a

Manager has no self-interest and will not his job in case the firm gets acquired

Group 1b Group 2b

Table 1: an overview of the distribution of subjects over different conditions

In both the conditions of a small and large firm-size the subject will be part of an industry where there are both smaller and larger firms than their own firm. Participants of the

1_{The appendix contains the complete questionnaire in both English and Dutch}

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questionnaire, subjects, will face four different situations. The variables in the situations will be corrected to have four different situations that meet the requirements for testing the hypothesis. The situations will differ in percentage-levels of the chance of the firm being acquired by a competitor, for being a manager with or without self-interest and losing the job in case the firm gets acquired and the number of firms that are smaller and larger than the subject’s firm-size. The situations will also have fixed variables. These variables are: the number of firms in the industry, percentage-level of estimated negative return for the stock of the firm in case the manager decides to acquire a firm himself. Table 2 shows an overview of the variables involved in the experiment.

Variable: Value:

Dependent Variable:

Decision for the subject to

do a defensive acquisition: Acquire, do not acquire

Independent Variables:

Firm-size: Small, large

Self-interest including losing

job in case of being acquired: Self-interest, no self-interest Chance (%) of the firm being

acquired by a competitor: Threat_low: 30%, threat_high: 70% Number of firms larger than

your firm: Small firm: 8, large firm: 2

Number of firms smaller than

your firm: Small firm: 2, large firm: 8

Number of firms in industry: 10 (fixed) Return of the firm in case

of a defensive acquisition: -30% (fixed)

Table 2: an overview of all the dependent and independent variables

All subjects will face the same four situations. The only difference between subjects is their firm-size. In all situations there is a threat that firm might get acquired by a

competitor. This threat is in two situations 30% (situation A and C) and in the other two situations it is 70% (situation B and D). In situation A and B the manager of the firm has no self-interest and will not loses his job in case the firm gets acquired and in situation C and D the manager has self-interest and loses his job if the firm gets acquired. We choose to have two different strengths of the threat of being acquired by a competitor to be able

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to do a more complete test for the factors firm-size and self-interest. We did this because the main difference for a firm inside and outside a M&A-wave is difference in the threat of being acquired. A realistic chance in percentages of the threat of being acquired for a certain moment in a M&A-wave does not follow from previous literature. Therefore we choose to test the factors under a relative small to a relative large threat. Lastly, it is important that we correct for an influence of order of the four situations on the results by applying randomization of the order of questions. With this set-up of the experiment we will try to find an answer to the research question of this paper.

In advance to the four questions regarding the four situations, situation A, B, C and D, the subjects will face one question. This question will be the same for all subjects. In this question a situation is described in which only is given that there is a very large chance of being acquired (>75%) by a competitive firm. The subject will have two choices: either increase in firm-size by acquiring a competitor, by doing so the subject will decrease the chance of being acquired to less than 5%, or doing nothing and face chance of being acquired. Furthermore, subjects are told there is no information available on the

consequences for the subject’s role as a manager or the consequences to the firm in case of being acquired by a firm. It is important that this question is the first question of the questionnaire so that the subject did not had previous questions with information given on possible consequences of being acquired. With including this question we can test the baseline attendance to acquire. This question is interesting because if we find results for this question that show that subjects choose to acquire a firm, even though there is no information on possible consequences of being acquired, we can state that a subject is likely to have a personal motivation for a desire to keep control of his company. We do not test the motivation for subject’s action through a direct question. Therefore we cannot define the motivation for the subject’s action.

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Furthermore, subjects will be asked a post-experimental question. This question is the last question of the questionnaire and will be asked after the subject completed the questions for the experiment. The post-experimental question will be: Which factors, that were not

included in the survey, would you further find important for making a decision as described in the survey? We could suggest that the answers that subject give to this

question might be the motivation to their action on the first question of the experiment that is asked to the subject, where we test the baseline attendance to acquire. Also, by using the answers to this question we can do explorative research and might find interesting subjects for further research.

After all there is some limitation to this experimental research. The subjects are not asked about their occupation, age, gender or other personal characteristics. Therefore we cannot test whether there is a different result for different subgroups. The reason why we do not asked for these characteristics of the subjects is that the questionnaire is anonymous because of simplicity for securing subject’s personal information.

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2. Data Analysis

For this thesis, the dataset will be collected, through a questionnaire. The subjects are all students. To be able to more generalize my results to the real group of interest, CEO’s of firms whom have to decide whether to merge or acquire during a M&A wave, I choose to use as much students with economic backgrounds.

All data from this survey, except for the post-experimental question, is dichotomous data. This means the data is categorical and only contains values of one and zero, that

respectively represents the subject’s answer to a question; to acquire or not to acquire. Therefore we cannot use the most common used parametric tests. We have to use a non-parametric test.

To test the baseline attendance to acquire we test the results from the first question of the questionnaire. In this first question of the questionnaire is only given that there is a chance of being acquired by a competitor and that a subject can reduce this chance to less than 5% by acquiring a firm himself or the subject can do nothing and face the chance of being acquired, no further information on possible consequences is given. We will first look at the frequency and the percentage of subjects who choose to acquire for the total of subjects and also per condition small-firm and large-firm. This question is exactly the same for both the condition small-firm and large-firm. Therefore, no significant difference in results is expected for firm-size. A Chi-squared test will be used to test independence of firm size for this question. A Chi-squared test will also be used to test the null hypothesis: it is as likely that subjects choose to acquire as they choose not to acquire. The two-sided alternative hypothesis is that it is not as likely that subjects choose to acquire as they choose not to acquire.

For testing the effect of firm-size and self-interest a subject is asked four questions with different situations. The data resulting from the answers of the subjects for these four situations is distinguished for the condition firm-size. Therefore we have data for subjects with the condition small-firm for the four situations as we have data for subjects with the condition large-firm for the four situations. To also be able to test the total effect of

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interest and an increasing threat of being acquired we made an extra variable in which we combined the answers of both small-firm and large-firm. By doing so we have data of the four situations for all subjects together, without distinguishing for firm-size.

To test the effects of firm-size use a non-parametric test that is able to use for data from a between-design. This means we will test subjects with the condition small-firm to data from the subjects with the condition large-firm. Therefore a Chi-squared will be used. The null-hypothesis is that it is as likely that subject choose to acquire as they choose not to acquire. The one-sided alternative-hypothesis is that it is more likely that subjects choose to acquire than subjects choose to not acquire.

For testing the effect of self-interest we will test data with a within-design. This means we will test data of subjects with the condition small-firm and large-firm separately. It is likely that an answer a subject has given to a question is influenced by the answer a subject has given to a previous question. As a result the data is paired and a Chi-test cannot be used. For testing the effect of self-interest we will multiple test data of two questions. For example, what is the effect if we add self-interest to the situation? One way to test the effect is to test situation A (manager without self-interest, threat of 30% to be acquired) to situation C (manager with self-interest, threat of 30% to be acquired). To test the paired data of two questions we will use the McNemar test. The McNemar test assumes there is non-parametric paired data for two measurements points and that there is sufficient data. First we will see whether there is a difference between situations by comparing frequencies of actions. Next, the McNemar test is able to test a possible difference on statistical significance.

The McNemar test applies on a 2 x 2 table. In this table the amount of subjects is given that before and after at treatment chooses action one or action two, in this case acquire or do not acquire. A 2 x 2 table that applies for this research is shown in table 3. Situation 1 applies on a situation before treatment (no self-interest) and situation 2 applies to a situation after the treatment (self-interest). The cells from this table that are important are cell b and cell c. The McNemar test will test whether the difference between cell b and c

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is by chance or as a result from the treatment. The null-hypothesis to test the effect of self-interest is that the two marginal probabilities for the two actions, acquire and do not acquire, are the same. The one-sided alternative hypothesis is that the marginal

probability of the action acquire is larger than the marginal probability of the action do not acquire. Situation 2, acquire Situation 2, do not acquire Row total Situation 1, acquire Situation 1, do not acquire

a c b d a + b b + d Column total: a + c b + d n

Table 3: A 2 × 2 contingency table, used for a McNemar test, that tabulates the number of subjects that choose an action before and after a treatment

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3. Results

The questionnaire was taken under one hundred thirty-seven subjects. One hundred and four subjects completed all the questions from the questionnaire. We choose to eliminate all subjects who did not complete the questionnaire and who did completion

questionnaire but in less than three minutes. All one hundred subjects who completed the whole questionnaire in more than three minutes are considered valuable and will be used to test the hypotheses for this research. This is seventy-three percent of the total of subjects who started the questionnaire. From the hundred used subjects fifty-four have the condition small-firm and forty-six have the condition large-firm. This is uneven due to that more subjects with the condition large-firm did not finish the questionnaire or finished it with an unrealistic duration.

3.1 Baseline attendance to acquire

In our total sample 89% of the subjects decided under a large threat of being acquired by a competitor to acquire a firm to reduce the chance of being acquired to less than 5%, when no further information was given on possible consequences of being acquired. Under the condition small-firm 90.7% choose in this situation to acquire whereas under the condition large-firm 87% choose to acquire. For this question there are statistically significant more subjects that choose to acquire, χ2_{(1, N = 100) = 60.84,}_p_{= .000. Also, a}

chi-test shows no significant effect for the relative small difference of percentages that choose to acquire between firm-size, χ2_{(1, N = 100) = 0.363,}_p_{= .5467}_._{This means that}

the variables small-firm and large-firm are independent and that in advance to this test there was no difference expected for firm size.

3.2 The effect of firm-size

To test the effect of firm-size we use the data of the between-design, we test data of a subject with the condition small-firm to the data of a condition large-firm. A Chi-squared test will be used to test the effect of firm-size. To test the same questions to each other we will be able to say something about causality because the only difference in the data is the condition firm-size. The data exist of data of the four situations (A, B, C and D) with

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different circumstances, regarding the threat of being acquired and self-interest. Therefore we do four tests. Testing situation A (threat 30%, no self-interest) for a difference between small-firm and large-firm shows no statistically significant effect for firms-size, χ2_{(1, N = 100) =.193,}_p_{=.331. Also for situation B (threat 70%, no}

self-interest) no statistically significant effect was found for firm-size, χ2_{(1, N = 100) =.975,}_p

=.162. For both situation C (threat of 30%, no self-interest) and situation D (threat of 70%, self-interest) no statistically significant effect for firm-size was found, respectively

χ2_{(1, N = 100) =.576,}_p_{=.224 and}χ2_{(1, N = 100) =.570,}_p_=.225.

3.3 The effect of self-interest

To test the effect of self-interest we compare the situations (questions) where all circumstances accept for the factor self-interest are the same. This means we compare situation A (threat of being acquired 30%, no self-interest) with situation C (threat of being acquired 30%, interest) and situation B (threat of being acquired 70%, no self-interest) with situation D (threat of being acquired 70%, self-self-interest). Also, the effect of self-interest is tested separately for the condition small-firm, large-firm and the combined data of both small-firm and large-firm. First we look for every situation at the

percentages of subjects that choose to acquire. Second we test a possible effect on statistical significance with the McNemar test. So, situations with and without self-interest are compared under a threat of being acquired of 30% and 70%.

When self-interest is included in a situation we find an increase of the amount of subjects that chooses to acquire for both the conditions small-firm and large-firm and also for the total effect by testing the combined data. The increase of subjects that choose to acquire for the condition small-firm is +16.6% under a threat of 30% and +27.8% under a threat of 70%. For the condition large-firm the increase is 13.1% under a threat of 30% and 10.9% under a threat of 70%. When we test the combined data to test the total effect of

self-interest we find an increase when we include self-self-interest of 15% under a threat of 30% and 20% under a threat of 70%. These results are tabled in table 4, 5 and 6.

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To test whether the observed increases are statistically significant we use the McNemar test. For the condition small-firm an exact McNemar test determined that there was a statistically significant effect for the variable self-interest under a threat of 30% and 70%, respectively p = .025 and p = .002. For the condition large-firm no statistically significant effect was found for self-interest under either a threat of 30% nor 70%, respectively p = .055 and p =.166. For the combined data a statistically significant effect was found for self-interest under a threat of 30% and 70%, respectively p =.0.003 and p =.001.

Condition: small-firm 30% threat of being acquired 70% threat of being acquired No self-interest Self-interest 27.8% 44.4% 44.4% 72.2% Effect of including self-interest: +16.6% +27.8%

Table 4: Percentage of subjects with the condition small-firm that, given the characteristics of the situation, choose to acquire a firm as a defensive action

Table 5: The percentage of subjects with the condition large-firm that, given the characteristics of the situation, choose to acquire a firm as a defensive action

Table 6: Percentage of total subjects (data of small-firm and large-firm combined) that, given the characteristics of the situation, choose to acquire a firm as a defensive action

Condition: large-firm 30% threat of being acquired 70% threat of being acquired No self-interest Self-interest 23.9% 37.0% 54.3% 65.2% Effect of including self-interest: +13.1% +10.9%

Combined data 30% threat of being acquired 70% threat of being acquired No self-interest Self-interest 26.0% 41.0% 49.0% 69.0% Effect of including self-interest: +15% +20% 16

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3.4 Results from the post-experimental question

The post-experimental question about what subjects find important factors, that were not included in the survey, for making a M&A-decision was optional to answer. Eighty-three subjects answered this question. The factors that most subjects further find important for making a M&A-decision are: the consequences for the employees of the firm of the manager, possible career opportunities for the manager in both the cases of acquiring and not acquiring a firm, the current market conditions of industry of the firm, the new market share in case of acquiring a firm and the personal affection of the manager with the firm.

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4. Discussion and Conclusion

The aim of this paper is to test the effect of firm-size and self-interest on the decision to merge or acquire in a merger and acquisition wave, given that the merger or acquisition is non-profitable and there is a chance of being acquired itself. The effects were tested by manipulation them in a questionnaire.

It follows from the results of this research that managers have a baseline attendance to acquire a competitive firm, if by doing so they can prevent their own firm of being acquired by a competitor. The question that was used to test the baseline attendance to acquire did not give any information on possible consequences of losing control over the company. This result shows that subjects have their own ideas of possible consequences from losing control over the firm and therefore have a motivation for choosing to acquire to keep control over the firm. A limitation to this test is that the motivation is not tested. The motivation could be based on self-interest and non-self-interest factors. An idea for further research is that the motivation for subjects that choose to acquire, when no possible consequences are given for being acquired, is asked.

Although the motivation for the subject that choose to acquire regarding the question testing the baseline attendance to acquire is not tested, a significant effect for self-interest was found for the data of the questions that tested the effect of self-interest. In the

questions where the effect of self-interest was tested, the subjects had to make a choice between securing their job while reducing firm-value or facing uncertainty about their job and maintain firm-value. A significant effect of self-interest was found for subjects with the condition small-firm. Contrary no significant effect was found for the subjects with the condition large-firm. On the other hand, when testing the combined data of subjects with small- and large-firm, a significant effect for self-interest was found. The significant effect for self-interest for the data of the condition small-firm and the combined data is in line with the theory of Jensen and Ruback (1983); managers with self-interest are more likely to act in a defensive acquisition that reduces firm-value but secures their position, because they are likely to either have a subordinated role or lose their job when their firm

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gets acquired. The difference in results for the effect of self-interest for small-firm and large-firm subjects was unexpected. The result of this test shows that managers of small firms are more likely to act with self-interest than managers of large-firms do. There are a few explanations why there is a significant effect for self-interest found for the combined data while it is not found for the data of large-firm subjects. First, the combined data contains the data of both small- and large-firm subjects. The significant effect found for small-firm subjects is strong enough to still show a significant effect for self-interest when the data of small-firm subjects is combined with the data of large-firm subjects. Second, the combined data has more observations than testing the data of small-firm and large-firm separately. Therefore the test has a stronger power, which makes the

estimation of the effect more accurate.

We did not find a statistically significant effect for the variable firm-size on the decision to do a defensive acquisition. We predicted that a smaller firm is more likely to act in defensive acquisition than a larger firm. This prediction is based on that the chance of being acquired decreases with firm-size (Hasbrouck, 1995) and the restriction that firms can only acquire a firm of similar or smaller firm-size (Gorton et al., 2009). Given the restriction that firms could only acquire a firm of similar or smaller size, we expected that managers with a small-firm size would feel al larger threat of being a possible target for an acquisition than managers of large-firm size. From this point of view we expected that managers of small-firm were more likely to acquire a firm as a defensive action than managers of a large-firm would do. The results from this research are not in line with theory. A possible explanation for these results could be that the subject was not enough aware of the firm-size of his company. A subject was briefed about his firm-size by the introduction letter. An idea for further research is to make the subject more aware of the size of his firm by for example visualizing the size of the firms in the industry and by doing so creating the idea of, in line with the title of the paper closest to this paper (Gorton et al., 2009), eat or be eaten..

In the post-experimental question the subject was asked what factors, that were not included in the survey, the subject would find important when making a M&A-decision.

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The most frequently given answer that subjects had given to this question is that subjects would find it important what would happen to the employees of the firm of the manager in case the firm gets acquired. This shows that some subjects find it important to not only think about themselves while making a M&A-decision. This is in theory in contrast to self-interest. An idea for further research is to examine whether self-interest is only about carrying about your own interest or a combination of your own interest and the interest of others. This could be tested by assigning subjects the condition of being a manager with self-interest and facing situations with and without the factor of employees of the firm of the manager losing their job.

To conclude, a significant effect is found for managers to have a baseline attendance to acquire a competitive firm if by doing so they can avoid being. Also, a significant effect is found for self-interest for managers of a small-firm on the decision to do a defensive acquisition. No significant effect is found for the effect of firm-size on the decision to do a defensive acquisition.

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Reference list

Bradley, M., Desai, A. & Kim, H. (1988). Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms

Journal of Financial Economics, 21(1), 3-40

Duchin, R. & Schmidt, B. (2013). Riding the merger wave: Uncertainty, reduced monitoring, and bad acquisitions.

Journal of Financial Economics, 107, 69–88

Gorton, G., Kahl, M. & Rosen, R.J. (2009). Eat or Be Eaten: A Theory of Mergers and Firm Size.

Journal of Finance, American Finance Association, 64(3), 1291-1344

Harford, J. (2005). What drives merger waves?

Journal of Financial Economics, 77(3), 529–560

Harford, J. (2003). Efficient and Distortional Components to Industry Merger Waves. Working paper, retrieved from: http://ssrn.com/abstract=388441, 24-25

Hasbrouck, J. (1985). The characteristics of takeover targets q and other measures. Journal of Banking & Finance, 9(3), 351–362

Jensen, M. & Ruback, M. (1983). The market for corporate control: The scientific evidence.

Journal of Financial Economics, 11(1–4), 5–50

Mitchell, M.L. & Mulherin, J.H. (1996). The impact of industry shocks on takeover and restructuring activity.

Journal of Financial Economics, 41(2), 193–229

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Schwarfstein, D.S. & Stein, J.C. (1990). Herd Behavior and Investment. The American Economic Review,Vol. 80 (3).

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Appendix

Questionnaire in English

Introduction for a subject with the condition small-firm:

You are the CEO of a firm. Recently there had been a lot of acquisitions in the industry of your firm.

In the following situations there will be a chance that your firm is of interest by a larger firm for a hostile take-over.

There are two possible outcomes: your firm gets acquired or does not get acquired. All outcomes will have effect on the payoff of your job and the firm.

Whether you maintain your job or not in case your firm gets acquired depends on the situation. You highly value your job.

Firms can only acquire a firm that is of similar or smaller size. Your firm is a relative small firm in the industry. There are 10 firms in the industry. Your firm is the 3-smallest of the industry.

You have got two choices:

- You can reduce the chance of being acquired to less than 5% by increasing your own firm-size. You can do so by acquiring a firm of similar or smaller size yourself. - You do nothing. You face the chance of being acquired.

For every extra year you stay with the firm you receive a bonus that increases your salary with 50%.

The firm has shareholders who in their turn will be affected by the effects on the stock. In the end they decide about your performance and your continuation in the firm.

Read the situations carefully. The situations will differ in circumstances.

It will be up to you what to do: acquire a firm or do nothing.

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Introduction for a subject with the condition large-firm:

You are the CEO of a firm. Recently there had been a lot of acquisitions in the industry of your firm.

In the following situations there will be a chance that your firm is of interest by a larger firm for a hostile take-over.

There are two possible outcomes: your firm gets acquired or does not get acquired. All outcomes will have effect on the payoff of your job and the firm.

Whether you maintain your job or not in case your firm gets acquired depends on the situation. You highly value your job.

Firms can only acquire a firm that is of similar or smaller size. Your firm is a relative large firm in the industry. There are 10 firms in the industry. Your firm is the 3-largest of the industry.

- You can reduce the chance of being acquired to less than 5% by increasing your own firm-size. You can do so by acquiring a firm of similar or smaller size yourself. - You do nothing. You face the chance of being acquired.

For every extra year you stay with the firm you receive a bonus that increases your salary with 50%.

The firm has shareholders who in their turn will be affected by the effects on the stock. In the end they decide about your performance and your continuation in the firm.

Read the situations carefully. The situations will differ in circumstances.

It will be up to you what to do: acquire a firm or do nothing.

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Questions for the subject with the condition small-firm:

Question 1:

Analyst predict that there is a very large chance (>75%) that your firm will be acquired by a competitive firm in the industry. No further information is available on the

consequences for you and the firm in case a competitor acquires your firm.

 You increase the size of your firm by acquiring a competitive firm yourself. By increasing your firm-size you reduce the chance of being acquired to less than 5%. (1)  You do nothing. You face the chance of being acquired. (2)

Situation 1:

The estimated chance that one of the 7 larger firms sees your firm as a target for a hostile take-over is 30%. You have got two choices:

 You increase your firm-size by acquiring a firm of smaller or similar size. Now there is no more chance of being acquired. Due to this investment, the firm will lose 30% in value. Shareholders will not be happy about this. But you kept your job for this year and you kept the firm independent. (1)

 You don’t acquire a firm yourself. You face the chance of being acquired by a competitor. In this case there are two possible outcomes:

a) Your firm does not get acquired. The firm stays independent and financially healthy. The shareholders are happy and you receive your bonus for this year. b) Your firm gets acquired. You get a new similar position in the new firm and if you perform like before then you will receive your salary and bonus for this your. The situation for the shareholders does not change. (2)

Situation 2:

 You increase your firm-size by acquiring a firm of smaller or similar size. Now there is no more chance of being acquired. Due to this investment, the firm will lose 30% in

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value. Shareholders will not be happy about this. But you kept your job for this year and you kept the firm independent. (2)

Situation 3:

a) Your firm gets acquired. Shareholders are not happy about it. As a consequence they face uncertainty regarding the continuation of the firm. They can judge you on this by firing you.

b) Your firm does not get acquired. The firm stays independent and financially healthy. The shareholders are happy and you receive your bonus for this year. (2)

Situation 4:

a) Your firm gets acquired. Shareholders are not happy about it. As a consequence they face uncertainty regarding the continuation of the firm. They can judge you on this by firing you. (1)

b) Your firm does not get acquired. The firm stays independent and financially healthy. The shareholders are happy and you receive your bonus for this year.  You increase your firm-size by acquiring a firm of smaller or similar size. Now there

is no more chance of being acquired. Due to this investment, the firm will lose 30% in value. Shareholders will not be happy about this. But you kept your job for this year and you kept the firm independent. (2)

Post-experimental question:

Which factors, that were not included in the preceding situations, do you find important in making a decision about mergers and acquisitions?

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Questions for the subject with the condition large-firm:

Question 1:

Analyst predict that there is a very large chance (>75%) that your firm will be acquired by a competitive firm in the industry. No further information is available on the

consequences for you and the firm in case a competitor acquires your firm.

 You increase the size of your firm by acquiring a competitive firm yourself. By increasing your firm-size you reduce the chance of being acquired to less than 5%. (1)  You do nothing. You face the chance of being acquired. (2)

Situation 1:

Situation 2:

 You increase your firm-size by acquiring a firm of smaller or similar size. Now there is no more chance of being acquired. Due to this investment, the firm will lose 30% in

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value. Shareholders will not be happy about this. But you kept your job for this year and you kept the firm independent. (2)

Situation 3:

a) Your firm gets acquired. Shareholders are not happy about it. As a consequence they face uncertainty regarding the continuation of the firm. They can judge you on this by firing you. (1)

b) Your firm does not get acquired. The firm stays independent and financially healthy. The shareholders are happy and you receive your bonus for this year.  You increase your firm-size by acquiring a firm of smaller or similar size. Now there

is no more chance of being acquired. Due to this investment, the firm will lose 30% in value. Shareholders will not be happy about this. But you kept your job for this year and you kept the firm independent. (2)

Situation 4:

a) Your firm gets acquired. Shareholders are not happy about it. As a consequence they face uncertainty regarding the continuation of the firm. They can judge you on this by firing you.

b) Your firm does not get acquired. The firm stays independent and financially healthy. The shareholders are happy and you receive your bonus for this year. (2)

Which factors, that were not included in the preceding situations, do you find important in making a decision about mergers and acquisitions?

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Questionnaire in Dutch:

Introduction for a subject with the condition small-firm:

Je bent de CEO (hoofdmanager) van een bedrijf. Recentelijk zijn er veel overnames en fusies geweest in de industrie waarin jouw bedrijf actief in is.

In de situaties die volgen in dit onderzoek zal er een kans zijn dat een ander bedrijf jouw bedrijf ziet als doel voor een vijandige overname.

Per situatie zijn er twee mogelijke uitkomsten: een concurrerend groter bedrijf neemt jouw bedrijf over of er gebeurt niets. Beide uitkomsten hebben effect op zowel jouw salaris als op de financiële gezondheid van het bedrijf.

Het hangt van de situatie af of je ontslagen wordt in het geval dat je bedrijf wordt overgenomen. Je waardeert je baan sterk.

Een bedrijf kan alleen een ander bedrijf overnemen van gelijke of kleinere grootte. Jouw bedrijf is een relatief klein bedrijf in de industrie. Er zijn 10 bedrijven in de industrie. Jouw bedrijf is het 3-na-kleinste bedrijf van de industrie.

Je zal bij elke situatie twee keuzes hebben:

- Je kiest ervoor om zelf een ander bedrijf over te nemen. Op die manier vergroot je de grootte van je bedrijf. Hierdoor verlaag je de kans op een vijandige overname door een ander bedrijf naar minder dan 5%.

- Je kiest ervoor om niks te doen. Je laat de situatie zoals het is.

Voor elk jaar dat je bij het bedrijf blijft zal je een bonus krijgen waarmee je jouw salaris met 50% verhoogt.

Het bedrijf heeft aandeelhouders. Zij zijn de werkelijke eigenaren van het bedrijf en oordelen over jouw prestaties en continuïteit binnen het bedrijf.

Lees de situaties goed door. De situaties verschillen van elkaar met betrekking tot de omstandigheden en eventuele gevolgen van je keuzes.

Het is aan jou wat voor actie er wordt ondernomen: neem je een bedrijf over of niet?

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Introduction for a subject with the condition large-firm:

Je bent de CEO (hoofdmanager) van een bedrijf. Recentelijk zijn er veel overnames en fusies geweest in de industrie waarin jouw bedrijf actief in is.

In de situaties die volgen in dit onderzoek zal er een kans zijn dat een ander bedrijf jouw bedrijf ziet als doel voor een vijandige overname.

Per situatie zijn er twee mogelijke uitkomsten: een concurrerend groter bedrijf neemt jouw bedrijf over of er gebeurt niets. Beide uitkomsten hebben effect op zowel jouw salaris als op de financiële gezondheid van het bedrijf.

Het hangt van de situatie af of je ontslagen wordt in het geval dat je bedrijf wordt overgenomen. Je waardeert je baan sterk.

Een bedrijf kan alleen een ander bedrijf overnemen van gelijke of kleinere grootte. Jouw bedrijf is een relatief groot bedrijf in de industrie. Er zijn 10 bedrijven in de industrie. Jouw bedrijf is het 3-na-grootste bedrijf van de industrie.

Je zal bij elke situatie twee keuzes hebben:

- Je kiest ervoor om zelf een ander bedrijf over te nemen. Op die manier vergroot je de grootte van je bedrijf. Hierdoor verlaag je de kans op een vijandige overname door een ander bedrijf naar minder dan 5%.

- Je kiest ervoor om niks te doen. Je laat de situatie zoals het is.

Voor elk jaar dat je bij het bedrijf blijft zal je een bonus krijgen waarmee je jouw salaris met 50% verhoogt.

Het bedrijf heeft aandeelhouders. Zij zijn de werkelijke eigenaren van het bedrijf en oordelen over jouw prestaties en continuïteit binnen het bedrijf.

Lees de situaties goed door. De situaties verschillen van elkaar met betrekking tot de omstandigheden en eventuele gevolgen van je keuzes.

Het is aan jou wat voor actie er wordt ondernomen: neem je een bedrijf over of niet?

(31)

Questions for the subject with the condition small-firm:

Question 1:

Analisten schatten dat er een zeer grote kans (>75%) is dat jouw bedrijf wordt

overgenomen door een ander bedrijf uit de industrie. Verdere gegevens over eventuele positieve en/of negatieve gevolgen van een vijandige overname voor jou en jouw bedrijf zijn niet bekend. Je hebt twee mogelijkheden:

 Je vergroot je bedrijf door zelf een overname te doen. Hierdoor verklein je de kans om vijandig overgenomen te worden door een ander bedrijf naar minder dan 5%. (1)  Je doet niets. Je loopt het risico dat jouw bedrijf overgenomen wordt. (2)

Situation 1:

De kans dat een van de 7 grotere bedrijven in de industrie jouw bedrijf zal overnemen wordt geschat op 30%. Je hebt twee mogelijkheden:

 Je vergroot je bedrijf door middel van het overnemen van een ander bedrijf. Hierdoor is er de kans dat je zelf nog overgenomen wordt nihil. Het leidt wel tot een daling van de aandelen van het bedrijf van 30%. De aandeelhouders zullen niet blij zijn. Jij houdt je baan voor dit jaar en het bedrijf blijft onafhankelijk. (1)

 Je kiest ervoor om niets te doen. Je ondergaat de kans om overgenomen te worden. In dit geval zijn er twee mogelijke uitkomsten: a) Jouw bedrijf wordt niet overgenomen. In dit geval blijft het bedrijf onafhankelijk en financieel gezond. De aandeelhouders zijn blij en jij krijgt je salaris en bonus voor dit jaar. b) Jouw bedrijf wordt

overgenomen. Jij krijgt een nieuwe vergelijkbare positie binnen het nieuwe bedrijf en als je blijft presteren als voorheen dan krijg je jouw salaris en eventuele bonus voor dit jaar. Voor de aandeelhouders verandert er niets. (2)

Situation 2:

De kans dat een van de 7 grotere bedrijven in de industrie jouw bedrijf zal overnemen wordt geschat op 70%.Je hebt nu twee mogelijkheden:

 Je kiest ervoor om niets te doen. Je ondergaat de kans om overgenomen te worden. In dit geval zijn er twee mogelijke uitkomsten:

a) Jouw bedrijf wordt niet overgenomen. In dit geval blijft het bedrijf onafhankelijk en financieel gezond. De aandeelhouders zijn blij en jij krijgt je salaris en bonus voor dit jaar.

b) Jouw bedrijf wordt overgenomen. Jij krijgt een nieuwe vergelijkbare positie binnen het nieuwe bedrijf en als je blijft presteren als voorheen dan krijg je jouw salaris en eventuele bonus voor dit jaar. Voor de aandeelhouders verandert er niets. (1)

 Je vergroot je bedrijf door middel van het overnemen van een ander bedrijf. Hierdoor is er de kans dat je zelf nog overgenomen wordt nihil. Het leidt wel tot een daling van

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de aandelen van het bedrijf van 30%. De aandeelhouders zullen niet blij zijn. Jij houdt je baan voor dit jaar en het bedrijf blijft onafhankelijk. (2)

Situation 3:

Analisten schatten de kans dat een van de 7 grotere bedrijven in de industrie jouw bedrijf zal overnemen op 30%. Je hebt nu twee mogelijkheden:

 Je kiest ervoor om niets te doen. Je ondergaat de kans om overgenomen te worden. In dit geval zijn er twee mogelijke situaties:

a) je bedrijf wordt overgenomen. Aandeelhouders zijn hier niet blij mee. Zij

ondervinden nu onzekerheid over de voortgang van het bedrijf. Ze zullen je hier op kunnen afrekenen door je te ontslaan.

b) je bedrijf wordt niet overgenomen. In dit geval blijft het bedrijf onafhankelijk en financieel gezond. De aandeelhouders zijn blij en jij krijgt je bonus voor dit jaar. (2)

Situation 4:

b) je bedrijf wordt niet overgenomen. In dit geval blijft het bedrijf onafhankelijk en financieel gezond. De aandeelhouders zijn blij en jij krijgt je bonus voor dit jaar. (1)  Je vergroot je bedrijf door middel van het overnemen van een ander bedrijf. Hierdoor

is er de kans dat je zelf nog overgenomen wordt nihil. Het leidt wel tot een daling van de aandelen van het bedrijf van 30%. De aandeelhouders zullen niet blij zijn. Jij houdt je baan voor dit jaar en het bedrijf blijft onafhankelijk. (2)

Welke factoren, welk niet in de voorgaande situaties waren opgenomen, vind je verder belangrijk voor het nemen van een beslissing over fusies en overnames?

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Questions for the subject with the condition large-firm:

Question 1:

Analisten schatten dat er een zeer grote kans (>75%) is dat jouw bedrijf wordt

overgenomen door een ander bedrijf uit de industrie. Verdere gegevens over eventuele positieve en/of negatieve gevolgen van een vijandige overname voor jou en jouw bedrijf zijn niet bekend. Je hebt twee mogelijkheden:

 Je vergroot je bedrijf door zelf een overname te doen. Hierdoor verklein je de kans om vijandig overgenomen te worden door een ander bedrijf naar minder dan 5%. (1)  Je doet niets. Je loopt het risico dat jouw bedrijf overgenomen wordt. (2)

Situation 1:

De kans dat een van de 3 grotere bedrijven in de industrie jouw bedrijf zal overnemen wordt geschat op 30%. Je hebt nu twee mogelijkheden:

Situation 2:

De kans dat een van de 3 grotere bedrijven in de industrie jouw bedrijf zal overnemen wordt geschat op 70%.Je hebt nu twee mogelijkheden:

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Situation 3:

b) je bedrijf wordt niet overgenomen. In dit geval blijft het bedrijf onafhankelijk en financieel gezond. De aandeelhouders zijn blij en jij krijgt je bonus voor dit jaar. (1)  Je vergroot je bedrijf door middel van het overnemen van een ander bedrijf. Hierdoor

is er de kans dat je zelf nog overgenomen wordt nihil. Het leidt wel tot een daling van de aandelen van het bedrijf van 30%. De aandeelhouders zullen niet blij zijn. Jij houdt je baan voor dit jaar en het bedrijf blijft onafhankelijk. (2)

Situation 4:

b) je bedrijf wordt niet overgenomen. In dit geval blijft het bedrijf onafhankelijk en financieel gezond. De aandeelhouders zijn blij en jij krijgt je bonus voor dit jaar. (2)

Welke factoren, welk niet in de voorgaande situaties waren opgenomen, vind je verder belangrijk voor het nemen van een beslissing over fusies en overnames.

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Test Statistics

Test Statistics of testing the baseline attendance to acquire:

Test Statistics m&a_question_ withoutfurtherinf ormation Chi-Square 60.840a df 1 Asymp. Sig. .000

a. 0 cells (0.0%) have expected frequencies less than 5. The minimum expected cell frequency is 50.0.

Test Statistics of testing the effect of self-interest:

Tests for small-firm:

Situation A (threat of 30%, no self-interest) with Situation C (threat of 30%, self-interest)

Chi-Square Tests

Value Exact Sig. (2-sided)

McNemar Test .049a

N of Valid Cases 54 a. Binomial distribution used.

Situation B (threat of 70%, no self-interest) with situation D (threat of 70%, self-interest)

McNemar Test .003a

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Tests for large-firm:

McNemar Test .109a

McNemar Test .332a

Test for the combined data of small-firm and large-firm:

McNemar Test .006a

McNemar Test .002a

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Test statistics of testing the effect of the variable firm-size:

Testing the data of situation A (threat of 30%, no self-interest) for an effect of firm-size.

Chi-Square Tests Value df Asymp. Sig.

(2-sided) Exact Sig. (2-sided) Exact Sig. (1-sided) Pearson Chi-Square .193a 1 .661 Continuity Correctionb .044 1 .833 Likelihood Ratio .193 1 .660

Fisher's Exact Test .819 .418

Linear-by-Linear

Association .191 1 .662

N of Valid Cases 100

a. 0 cells (0.0%) have expected count less than 5. The minimum expected count is 11.96. b. Computed only for a 2x2 table

Testing the data of situation B (threat of 70%, no self-interest) for an effect of firm-size.

Linear-by-Linear

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Testing the data of situation C (threat of 30%, self-interest) for an effect of firm-size.

Linear-by-Linear

Testing the data of situation D (threat of 70%, self-interest) for an effect of firm-size.

Linear-by-Linear