Cultural diversity in the executive suite and
international acquisition performance
Bram Fiselier
S2226669
Supervisor: Dr. V. Purice
Januari 2017
Master’s thesis
University of Groningen
Faculty of Economics and Business
International Financial Management
MSc International Financial ManagementFaculty of Economics and Business University of Groningen
Abstract
Many researchers tried to determine the performance effects of cross-border mergers and acquisitions, and what triggers this performance. This thesis contributes to this field of literature by investigating the role of cultural diversity within the executive board on acquisition performance. Where most studies focus on the announcement effects of cross-border acquisitions, this thesis focuses on the long-term effects, trying to capture the role of the executive board in the integration process after an acquisition becomes effective. Using a multivariate clustered regression on a sample of 120 cross-border acquisitions conducted by European firms between 2007 and 2012, this thesis investigates the influence of certain variables related to culture on long-term international acquisition performance. The results show that acquiring firms perform well in the long run after an international acquisition. No evidence was found for the impeding effect of cultural distance on this performance. The results show a positive effect of cultural board diversity on long-term acquisition performance. This effect increases as cultural distance increases. Furthermore, having executives from the target country on the board is beneficial as cultural distance increases. Evidence is also found for a negative effect of board age on long-term performance. Limited evidence is found for a positive effect of openness of the target firm’s country to the world economy on this performance.
1. Introduction ... 1
2. Theory ... 3
2.1 Mergers and acquisitions ... 3
Acquisition performance ... 5
2.2 International acquisitions ... 5
Opportunities ... 5
Challenges ... 6
International acquisition performance ... 9
2.3 Cultural board diversity ... 10
Positive effects ... 11
Negative effects ... 12
3. Data and Methodology ... 13
3.1 Data Collection ... 13 3.2 Variables ... 14 Independent variables ... 14 Control Variables ... 15 3.2 Methodology ... 19 4. Results ... 22
4.1 Multivariate clustered regression ... 22
5. Discussion... 26
5.1 Cultural distance ... 26
5.2 Cultural board diversity ... 28
Cultural board diversity and cultural distance ... 29
5.3 Executive board members from target country ... 29
6. Conclusion ... 30
6.1 Summary ... 30
6.2 Implications for practice ... 31
1
1. Introduction
The number of mergers and acquisitions grew heavily over the last couple of decades. The majority of this rise is attributable to the growth in domestic acquisitions. The importance of cross-border acquisitions, however, is increasing. The share of cross-cross-border acquisitions in the number of total acquisitions grew from 23% in 1997 to 45% in 2007. The value of all cross-border mergers and acquisition in 2014 combined was $3.4 trillion (Raice, 2015). To put this in perspective, only five countries worldwide, the United States, China, Japan, and Germany, had a GDP higher than the combined value of all worldwide conducted international mergers and acquisitions.
Mergers and acquisitions attracted much attention from scholars in the previous two decades. Previous research tried to identify the effects of mergers and acquisitions on firm performance. The results of these studies vary. Some studies report positive performance effects of mergers and acquisitions on firm performance (Healy et al., 1992; Wright et al., 2001), but most researchers found value destroying effects (King et al., 2004; Agrawal et al., 1992)
.
However, the case of international acquisitions seems to be different. Multiple scholars found positive performance effects of these acquisitions (Goergen and Renneboog, 2004; Chakrabarti et al., 2009; Gubbi et al., 2010). However, also in this case, some studies presented value-destroying effects (Datta and Puia, 1995). Thus, although it seems that cross-border acquisitions perform better than domestic ones, scholars do not seem able to reach consensus on the performance effects of these acquisitions, and what triggers this performance.To create value in acquisitions, the combined firm should capture synergies (Larsson and
Finkelstein, 1999). The more a company is able to capture these synergies, the more value it could create. If a company fails to capture these synergies, acquisitions will destroy value. To capture synergies, integrating the two entities in a proper way is important (Lemieux and Banks, 2007; Lajoux, 2006). Thus, acquisition performance not only depends on proper due-diligence in the pre-acquisition phase but also on a sound post-pre-acquisition strategy.
2 exchange (Lin and Germain, 1998), result in lower commitment and cooperation by the employees of the acquired firm (Very et al., 1996), lead to misunderstanding about assignments due to differences in administrative routines between cultures (Heiman et al., 2008; Heiman and Nickerson, 2004), and lead to more day-to-day operating conflicts (Jemison and Sitkin, 1986). Therefore, one would expect cultural differences to have an impeding effect on acquisition performance. However, this might not be that evident. Cultural differences could provide some opportunities as well. For example, acquiring firms in culturally distant countries could provide the acquirer access to unique and potentially valuable capabilities (Chakrabarti et al., 2009), break rigidities and therefore enhance innovation and learning, and lead to a higher level of predisposition of managers in managing cultural differences (Goulet and Schweiger, 2006).
Another factor that could influence acquisition performance is board diversity. Board diversity attracted much attention from scholars in the last decade. Diversity is “any attribute that another person may use to detect individual differences” (Williams and O’Reilly, 1998, p.79). Previous research on diversity primarily focused on differences in gender, age, ethnicity, tenure, educational and functional background (Millikens and Martins, 1996; Williams and O’Reilly, 1998). This thesis focuses on the cultural backgrounds of executives. Markets worldwide seem to get integrated more and more, and the number of firms operating internationally is growing. This trend is also visible within boards, which are getting increasingly international (Staples, 2007). This thesis investigates if acquiring companies benefit from cultural diversity within the executive board in the event of an international acquisition. Focusing on executive board’s characteristics allows for better prediction of organizational outcomes than by focusing on CEO's characteristics only (Hambrick et al., 1996). Many other studies focused on the role of the full board of directors instead of focusing on just the executive board. This thesis takes into consideration the executive board only, since they are responsible for implementing strategic decisions and day to day operations, and thus have a direct impact on post-acquisition integration, and therefore, performance (Fama and Jensen, 1983).
3 success (Alon and Higgins, 2005), higher level of creativity and problem solving capabilities (Dutton and Duncan, 1987), are less subject to the domestic myopia concept (Barkema and Vermeulen, 1998), could generate trust among a firm’s product and geographic unit managers (Kim and Mauborgne, 1991), and increased socio-cognitively complexity, leading to a greater ability to cope with changing international market opportunities and handling conflicts and paradoxes related to acquiring internationally (Murtha et al., 1998).
This thesis focuses on cultural diversity within the executive boards of acquiring companies, and its effect on international acquisition performance. Short-term event studies are a common way to measure acquisition performance (Datta and Puia, 1995; Li, Li and Wang, 2016). However, by doing so, only the performance implications around the announcement date of an acquisition are captured, which are subject to investor overreaction and do not provide insights in the long-term performance (De Bondt and Thaler, 1985). Since this thesis tries to shed light on the long-term effects of culturally diverse executive boards in the post-acquisition phase, this methodology is not appropriate. Therefore, a long-term event study is conducted using the ‘buy-and-hold abnormal return’ methodology. This methodology defines performance by measuring long-term investor experience. A multivariate clustered regression is used to investigate the effect of cultural board diversity, among other variables, on the long-term acquisition performance of a sample of 120 European acquirers.
This thesis is structured as follows. Section 2 discusses related literature and provides the hypotheses. Section 3 describes the data and methodology used. Section 4 reports the regression outcomes. Section 5 contains the discussion. Finally, section 6 presents concluding remarks.
2. Theory
This section provides an overview of the relevant literature related to international acquisitions and board diversity. This section will start off with an explanation on how companies can capture value in acquisitions, followed by an overview of the opportunities and challenges in international acquisitions. Finally, the potential role of cultural board diversity in international acquisitions will be explained.
2.1 Mergers and acquisitions
4 interest in another company, which means that more than fifty percent of the voting rights should be acquired. It involves the purchase of assets or shares of the target firm by the acquiring firm, with the target firm continuing to exist as a subsidiary of the acquirer. In the case of a merger, two firms are combined into one firm, so one of the firms ceases to exist (DePamphilis, 2008).
Synergies
Firms can create value through acquisitions if synergies are present. If the combined company is able to be more profitable than the individual companies before the acquisition, synergies occur. According to Straub (2007), the value of an acquisition is equal to the value of the combined companies after the acquisition minus the values of both companies before the acquisition, the premium paid, and the expenses made in the acquisition process.
Haleblian et al. (2009) identified several ways in which synergies could arise. The first one is through higher market power. The idea behind this is that having fewer firms in an industry increases pricing power on firm-level. Therefore, it is easier for the combined firm to increase their prices, since it is bigger. The increase in size also improves a firm’s bargaining power with its suppliers. Larger firms can demand lower prices from their suppliers. Previous literature provides evidence for this hypothesis (Prager, 1992; Kim and Singal, 1993). Secondly, synergies could arise through economies of scale (McGuckin and Nguyen, 1995; Banker et al., 2003). In this case, marginal costs decrease as production volume increases. Bigger production volumes allow companies to use different, more cost-efficient production methods. Furthermore, firms could reduce the number of employees by combining overlapping departments into one single department which results in savings on salaries (Straub, 2007). Thirdly, through redeployment of assets and competency transfers acquisitions can generate economies of scope (Capron et al., 1998; King et al, 2008). An acquisition may enlarge a company’s product line. In this case, product names, distribution channels, and customer bases can be used for multiple products, which could enable firms to more easily enter new markets and save costs through bundling strategies. Finally, synergies could arise through market discipline. This hypothesis states that acquisitions could create value by disciplining incompetent managers (Jensen, 1986; Jensen and Ruback, 1983). Agrawal and Walkling (1994) showed that CEOs of acquired firms are often dismissed once the acquisition is completed.
5 capacity (Reus and Lamont, 2009). Absorptive capacity is “the ability to recognize the value of new information, assimilate it, and apply it to commercial end” (Cohen and Levinthal, 1990, p.128). So, the higher the absorptive capacity of a company, the higher its capability to use the information and resources obtained by an acquisition and the more successful it will be in integrating the two separate entities. Scholars recognized the importance of a proper integration strategy (Lemieux and Banks, 2007; Lajoux, 2006). According to them, acquisition performance depends on a sound post-acquisition integration strategy as well, besides proper due-diligence of the target company prior to the acquisition. If the two entities are not integrated properly, a company will not be able to capture synergies and create value in an acquisition (Gates and Very, 2003).
Acquisition performance
Companies engage in acquisitions to capture potential synergies. Many scholars found, however, that despite the synergy potential, acquisitions in general diminish value. Some studies reported positive performance effects of acquisitions (Healy et al., 1992; Wright et al., 2002), but most studies show adverse effects of acquisitions (King et al., 2004; Agrawal et al., 1992). Thus, although acquisitions are a popular way of expanding businesses and enabling growth, it seems that firms have difficulties reaping the benefits of these acquisitions. Therefore, many scholars tried to find out what triggers acquisition performance. These studies, however, do not provide any prerequisites that aid the estimation of acquisition performance (Straub, 2007). The different conclusions of the studies on acquisition performance show that acquisitions are complex events, involving the interaction of a vast number of variables.
2.2 International acquisitions
International acquisitions provide a different set of opportunities and challenges than domestic acquisitions. In this subsection, the various opportunities offered in such acquisitions is explained, followed by the challenges acquiring firms face.
Opportunities
6 in foreign countries (Hitt and Pisano, 2003). Acquiring companies in these markets could help firms overcome these barriers. In this way, international acquisitions could provide companies access to foreign markets that are difficult to access in other ways. Entering foreign markets provides an opportunity for firms to expand the market for their current products. This provides economies of scale and lowers marginal costs. As a result, international acquisitions enable firms to grow faster and enhance their profitability.
Secondly, international acquisitions are a form of geographical diversification. When firms operate internationally, they spread their risks over multiple countries and markets, which results in firms being less reliant on one single market. Furthermore, the fluctuating revenue flows due to different economic conditions in various markets will be outbalanced by international diversification.
Thirdly, international acquisitions offer companies opportunities to gain new knowledge and capabilities (Barkema and Vermeulen, 1998; Very and Schweiger, 2001). Societal and corporate cultures differ across countries, which offers firms opportunities to learn about new capabilities and managerial practices from the acquired companies. For example, firms can exchange knowledge of operational methods, know-how, and feedback regarding products and procedures (Javidan et al., 2005). Furthermore, international acquisitions could provide firms access to new resources. Many companies do not have all the resources necessary to implement certain strategies, especially when it concerns entering markets in foreign countries. MNEs could use international expansion as a springboard to acquire strategic resources and reduce their institutional and market constraints at home and thereby, reduce the latecomer disadvantage (Luo and Tung, 2007). In an increasingly global and competitive market, firms need unique and valuable resources to gain a sustainable competitive advantage (Barney, 1991). By looking outside country borders, the variety of new and valuable resources firms could use to expand their existing resource base will be bigger. Therefore, international acquisitions could help firms to develop a unique and hard to imitate resource base, composed of existing resources combined with foreign acquired resources, which will give them an advantage over their competitors (Makino et al., 2002). Challenges
7 When a company wants to acquire another company, targets have to be identified and valued. The valuation of potential targets is a complex process in every acquisition (Hitt et al., 2001). In international acquisitions, this process is even more complicated (Angwin, 2001). Companies need to overcome the problems related to different accounting standards and practices and fluctuations in the foreign exchange rates in valuing foreign targets. One of the most challenging parts in valuing acquisition targets is assigning a value to intangible assets. This process is complex in domestic acquisitions, but even more so in international acquisitions. For example, understanding of the educational system in a country and skills and capabilities of the workforce may be required in valuing intangible assets. Furthermore, a firm’s reputation should be valued, which is harder in unfamiliar markets. Lastly, to appropriately value a company, critical environmental conditions should be assessed. It could, for example, be useful to identify the governmental regulations applicable to the firm (Hitt and Pisano, 2003).
Cultural differences
The most interesting challenges concerning this thesis are the challenges regarding the differences in culture between the acquirer’s and the target’s countries. “Culture consists of the unwritten rules of the social game. It is the collective programming of the mind that distinguishes the members of one group or category of people from others” (Hofstede et al., 2010, p.6). Hofstede et al. (2010) identified six dimensions of national culture. These six dimensions are individualism, power distance, masculinity, uncertainty avoidance, long-term orientation, and indulgence. Appendix C provides an overview of the dimensions. These dimensions can be used to calculate the cultural distance between two countries1. The cultural distance reflects the level of cultural
differences between groups, or between countries. The higher the cultural distance between two countries, the more these countries differ in relation to the cultural dimensions.
Several scholars recognized the importance of cultural distance matters in international
business(Hofstede et al., 2010; Trompenaars and Hampden-Turner, 1998; House et al., 2004), and
thus, in international acquisitions as well. For example, cultural differences could complicate the integration process in international acquisitions. As mentioned before, integrating issues are an important part of the acquisition process and could be of major importance in determining the success or failure of an acquisition (Lemieux and Banks, 2007; Gates and Very, 2003; Lajoux,
8 2006). The integration problem in international acquisitions is referred to as double-layered acculturation, the process in which a group adopts cultural characteristics of another group (Barkema et al., 1996). Double-layered acculturation is necessary for international acquisitions because of the different cultures represented in the acquiring and target firms. The literature provides several ways in which these cultural differences hinder a successful integration. Firstly, differences in languages could have disintegrative effects in international acquisitions (Piekkari et al., 2005). Secondly, there should be a certain ‘organizational fit’ when successfully integrating two companies. Datta (1991) showed that differences in leadership styles could result in the unsuccessful integration of two companies. This issue is likely to be higher in international acquisitions since leadership styles differ between cultures and countries (Van de Vliert, 2006). Thirdly, cultural differences could hinder the exchange of knowledge, which is crucial in successful integration, due to poor communication between managers from culturally different
countries(Lin and Germain, 1998; De Long and Fahey, 2000; Sales and Mirvis, 1984).
Besides the issues arising because of differences in culture in the integration phase of acquisitions, some long-term post-integration issues could arise as well (Reuer and Koza, 2000). The literature provides some examples of these issues. Firstly, tensions could arise because of differences in culture, resulting in lower commitment and cooperation by the employees of the acquired firm (Very et al., 1996). Secondly, different administrative routines in various cultures result in difficulties regarding the transfer of managerial skills between companies. Thirdly, limited understanding between culturally different parties leads to misunderstandings about assignments
(Heiman et al., 2008; Heiman and Nickerson, 2004)
.
Fourthly, the increased likelihood of targetcompany executives leaving the company in international acquisitions and its impeding effect on the learning effects, since valuable knowledge could be embedded in those executives (Li, Li and Wang, 2016; Hofstede et al., 2010). Finally, day-to-day operating conflicts arise in the case of many cultural differences (Jemison and Sitkin, 1986).
9 2003). Because of the extra costs related to operating in foreign markets, foreign firms have a certain competitive disadvantage compared to firms operating solely their local domestic market (Miller and Parkhe, 2002).
International acquisition performance
As mentioned in the previous section, the international aspect adds even more complexity to the already complex event of an acquisition, providing several opportunities and challenges. Scholars tried to shed light on the performance implications of cross-border acquisitions. For example, Goergen and Renneboog (2004), Chakrabarti et al. (2009) and Gubbi et al. (2010) found positive performance effects of cross-border acquisitions, while Datta and Puia (1995) found negative effects. Some scholars also remain inconclusive (Datta et al., 1992). Thus, although it seems that cross-border acquisitions result in better firm performance than domestic ones, scholars do not seem able to reach consensus on the performance effects of these acquisitions.
In investigating the performance effects of cross-border acquisitions, many scholars highlighted the effect of cultural differences on acquisition performance. Taking into account the possible effects of cultural differences on the integration process of an international acquisition, as presented in the previous subsection, it seems evident that differences in culture will have an impeding effect on acquisition performance (Datta and Puia, 1995; Morosini et al., 1998). However, this might not be as obvious as it seems. Chakrabarti et al. (2009), argued against this negative relationship. They provided evidence for a positive effect of cultural distance, as measured using the dimensions identified by Hofstede et al. (2010), on acquisition performance. Firstly, they state that culturally distant acquisitions could provide acquirers with a competitive advantage by offering them access to unique and valuable capabilities. Secondly, from an organizational learning perspective, culturally distant acquisitions could positively affect innovation and learning by breaking rigidities. Finally, managers are more disposed to managing cultural differences and pay attention to national cultural factors, which improves acquisition performance (Goulet and Schweiger, 2006).
10 characterized by a high cultural distance between acquirer and target country if the acquisition has substantial economic potential (Aguilera et al., 2004; Nahata et al., 2014).
In conclusion, previous research has shown that cultural differences potentially could provide synergies in acquisitions through capability transfer, resource sharing, and learning. However, cultural differences result in certain challenges as well. For example, these differences could lead to conflicts or hinder the exchange of knowledge in acquisitions. This could result in an unsuccessful integration of the two entities. Therefore, the first hypothesis is as follows:
H1: Cultural distance has a negative effect on the acquiring firm’s performance after an international acquisition
2.3 Cultural board diversity
Besides focusing on the cultural differences on country level and their impact on acquisition performance, this thesis takes into account firm level variables as well. One of these variables is the cultural diversity within the executive board of the acquiring company. Focusing on executive board’s characteristics allows for a better prediction of organizational outcomes than by focusing on CEO's characteristics only (Hambrick et al., 1996). Many other studies focused on the role of the full board of directors instead of focusing on the executive board only. The reason this thesis focuses on the executive board only is that the boards of directors are responsible for monitoring and influencing strategy only, not for implementing these strategies or day-to-day operations. The latter is the responsibility of the executive board (Fama and Jensen, 1983). In the case of international acquisitions, this means the executive board is responsible for the decisions and operations related to integrating the entities.
11 Some studies also addressed international diversity within boards. Oxelheim and Randøy (2003) showed that within European companies, the presence Anglo-Americans directors has a positive effect on its stock price and Masulis et al. (2012) found that foreign directors could add value when a firm is highly dependent on a foreign product market. However, there have also been studies finding a negative (Murray, 1989) or no significant relation between board diversity and firm performance (Michel and Hambrick, 1992). The question is, how diversity within boards could create value for companies, especially in the case of international acquisitions. The next subsections will provide an overview of the positive effects of cultural diversity on acquisition performance, as well as the possible negative implications.
Positive effects
12
Negative effects
Besides the positive influence of cultural board diversity, some scholars present negative arguments as well. For example, Chen and Macmillan (1992) argued that diversity might reduce the speed of firms in acting and responding to certain situations, which could hurt performance in complex events such as international acquisitions, where quick responses are needed. Furthermore, O’Reilly et al. (1989) showed that diversity could result in a lower rate of integration within groups, which could hurt performance. Thus, while board diversity could have positive performance implications, it might also be a double-edged sword, and result in lower performance.
Thus, although some scholars are presenting adverse effects of cultural diversity, the arguments presented by most scholars point towards a positive effect of cultural diversity on acquisition performance. Therefore, the second hypothesis in this thesis is as follows:
H2a: Cultural diversity within the executive board has a positive effect on the acquiring firm’s performance after an international acquisition
As explained before, cultural differences between the acquirer and the target could increase the complexity of an acquisition. Culturally diverse boards are more likely to possess a higher level of creativity, knowledge, and problem-solving ability, as mentioned above. Therefore, firms acquiring a target from a culturally distant country could reap more benefits from having a culturally diverse board. This leads to the following hypothesis:
H2b: The effect of having a culturally diverse executive board is higher in acquisitions characterized by a high cultural distance between acquirer and target
13 foreign networks. Furthermore, it could help the acquirer overcome the difficulties related to differences in languages (Piekkari, 2005). This leads to the following hypothesis:
H3a: Having members from the target firm’s country on the executive board has a positive effect on acquiring firm’s performance after an international acquisition
As with cultural diversity, the effect of having members from the target country on the board is likely to be greater in the case of a high cultural distance. Reasons for this is that firms acquiring a culturally distant target are less likely to have the necessary connections in that country. Furthermore, difficulties due to different languages could arise. Therefore, having someone on the board from the target country, who is likely to have connections in his home country and speaks the language, could be more beneficial for these firms. This leads to the following hypotheses:
H3b: The effect of having members from the target firm’s country on the executive board is higher in acquisitions characterized by a high cultural distance between acquirer and target
3. Data and Methodology
This section describes the data and methodology used to test the hypotheses. This section will start off with describing the data collection and sources, followed by an explanation of the variables employed in the regressions, and lastly, an overview of the methodology is provided. 3.1 Data Collection
Acquisition data is gathered using the mergers and acquisition database Zephyr, developed by Bureau van Dijk. The sample consists of full acquisitions only, that is, when the acquirer buys 100 percent of the target shares. By doing so, only the acquisitions where the acquirer obtains complete control over the target without any influence of other shareholders are considered. Furthermore, the sample includes only acquisitions with a deal value greater than 100 million euros. By including acquisitions with high deal value only, it is more likely that firms’ top executive managers will be involved in the deal. This allows for a clearer view on the role of executive board cultural diversity on acquisition performance.
14 target is headquartered in another country than the acquirer. Targets located in so-called tax havens (e.g. Cayman Islands) are excluded from the sample since firms mostly expand to these countries for a more favorable tax arrangement, not for value creation through operational means. Furthermore, firms in the sample should not have engaged in other acquisitions within three years before or after an acquisition, to prevent having overlapping events in the sample.
The initial sample consisted of 671 acquisitions. However, most of the acquirers in this sample engaged in multiple acquisitions throughout the years. After removing these, and removing firms acquiring firms in tax-havens, with unavailable data, and outliers, a sample of 120 acquisitions, conducted between 2007 and 2012, remained. Appendix A provides an overview of all the acquiring and target countries represented in the sample. Data regarding the composition and characteristics of the executive board and its directors is hand-picked by going through the annual reports of the acquiring firms and complemented with data from additional sources (e.g. Bloomberg and Thomson Reuters). Firm-specific performance data and characteristics are extracted from the Orbis database of Bureau van Dijk. Lastly, country-specific variables such as import, export, and GDP per capita are extracted from the Worldbank database, and data on bilateral trade flows between the target and the acquirer country is extracted from the STAN Bilateral trade database of the OECD.
3.2 Variables
Independent variables
The first independent variable in this thesis is the cultural distance between the acquirer country and the target country. The higher the cultural distance between the target and acquirer, the more cultural differences exist, and the harder it is to create value in acquisitions. Kogut and Singh (1988) developed a measure calculating the cultural distance between two countries based on the six cultural dimensions identified by Hofstede et al. (2010). This measure is widely used in the finance literature. The cultural distance between two countries is defined using the following formula:
𝐶𝐷𝑘𝑙 =
∑6𝑝=1(𝐼𝑝𝑘− 𝐼𝑝𝑙)/𝑉𝑝
15 Where CDkl is the cultural distance between acquirer country k and target country l, Ipk is acquirer country k’s score on the pth cultural dimension, Ipl is target country’s l’s score on the pth cultural dimension, and Vp is the variance of the score of dimension p.
The second independent variable used is executive board cultural diversity. The more cultural clusters represented in an executive board, the more culturally diverse this board is, and the more likely it will be that the acquisition will create value. The cultural clusters used in this study are derived from the GLOBE-study (House, 2004). This study grouped a large number of countries into several clusters, based on the cultural characteristics of these countries. The degree of cultural diversity on the board in the year before the acquisition is measured using the Blau-index (Blau, 1977; Harrison and Klein, 2007). The Blau-Blau-index calculates the level of diversity using the following formula:
𝐷𝐼𝑉𝑖 = 1 − ∑ (𝑥𝑚𝑖 𝑛𝑖 ) 2 𝑝 𝑖=1 (2)
Where DIVi is the cultural diversity within the executive board of firm i, p is the total
number of cultural clusters represented in the board, xmi is the number of members from cultural
cluster m in the executive board of firm i, ni is the total number of members in the executive board of firm i. The scores of the index reach from 0 (completely homogeneous) to 1 (complete heterogeneous).
Lastly, a variable measuring the percentage of executive board members from the target company’s country is included. These executives could help the acquiring company overcome the liability of foreignness and therefore boost long-term acquisition performance. This variable is calculated by dividing the number of members of the executive board from the target company’s country by the total number of members in the executive board.
Control Variables
16 less likely to come up with creative and innovative strategies and, in general, are less flexible (Rivas, 2012).
Secondly, a variable controlling for board size will be included. The level of heterogeneity of the board may be influenced by the size of the board. The influence of a single person might be reduced in larger boards (Amason and Sapienza, 1997; Haleblian and Finkelstein, 1993). This could affect the relationship between board diversity and acquisition performance.
Some firm-specific control variables are included as well. A variable controlling for firm age will be included by taking the natural logarithm of a firm’s age. Older firms may be more experienced in international acquisitions, which might affect the acquisition-performance relationship. For example, Fowler and Schmidt (1989) showed that post-acquisition financial performance was higher for older firms. A control variable for firm size is included as well. Moeller et al. (2004) found that small acquisitions by small acquirers resulted in increased performance, whereas large acquisitions by large acquirers led to losses. Conversely, Healy et al. (1992) found that large acquisitions normally resulted in positive post-acquisition performance. Thus, firm size is likely to affect acquisition performance in important ways, although further research is needed to find out how exactly. To control for firm size, a variable measuring the natural logarithm of the acquiring firm’s total assets by the end of the year prior to the acquisition is used, a common way to measure firm size in the finance literature.
Besides the control variables on firm level, some country specific control variables are also included in the analysis. These control variables ensure that the results are not driven by trade or GDP differences between countries, instead of culture. Firstly, a variable controlling for the economic differences between the countries is included. Economic differences between two countries might affect the performance of an acquisition (Chakrabarti et al., 2009). To measure these differences, the difference in GDP per capita of these countries is measured, which is often associated with major socio-economic differences between countries. The economic disparity of the two nations is calculated as follows:
𝐸𝐷𝑘𝑙 =
𝐺𝐷𝑃𝑘− 𝐺𝐷𝑃𝑙 𝐺𝐷𝑃𝑘+ 𝐺𝐷𝑃𝑙
(3)
Where EDkl is economic disparity between acquirer country k and target country l, GDPk
17 GDP per capita of target country l in the year prior to the acquisition. Secondly, a variable measuring the openness of the target to the world economy is added to the analysis. The openness of a country to the global economy could have an impact on acquisition performance. It could make managing the newly acquired business easier, and the new business division’s profits can be employed more efficiently (Chakrabarti et al., 2009). The openness of a target’s firm country to international firms is calculated as follows:
𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠𝑙= 𝐼𝑚𝑝𝑜𝑟𝑡𝑙+ 𝐸𝑥𝑝𝑜𝑟𝑡𝑙
𝐺𝐷𝑃𝑙
(4)
Where Opennessl is the openness of target country l to the world economy, Importl is the total import of target country l in the year prior to the acquisition, Exportl is the total export of target country l in the year prior to the acquisition, and GDPl is the GDP of target country l in the year prior to the acquisition. Thirdly, a variable is included that controls for economic synergies between the acquiring and target country. This variable is calculated by taking the natural logarithm of the sum of the target nation’s export to, and import from the acquiring firm’s country (Chakrabarti et al., 2009):
𝐵𝑖𝑙𝑎𝑡𝑒𝑟𝑎𝑙𝑘𝑙 = 𝑙𝑛 (𝐸𝑥𝑝𝑜𝑟𝑡𝑙𝑘 + 𝐼𝑚𝑝𝑜𝑟𝑡𝑙𝑘) (5)
Where Bilateralkl displays the economic synergies between acquirer country k and target
country l, Exportlk is the export of target nation l to acquirer nation k, and Importlk is the import of target nation l from acquirer nation k. Lastly, a variable is added controlling for the geographic distance between the acquirer country k and the target country l. Frankel and Romer (1999) showed that geographic distance between countries affects international trade. The variable is defined by taking the natural logarithm of the distance between the capital cities of acquirer country k and target country l. Data of distances between the capital cities is gathered using the ‘Distance between Capital Cities Data’ dataset of Kristian Gleditsch.
19 3.2 Methodology
One of the most common ways of measuring acquisition performance is by conducting a short-term event study (Datta and Puia, 1995; Li, Li and Wang, 2016). However, by doing so, only the performance effects around the announcement date of an acquisition are captured. Furthermore, research has shown that investors tend to overreact on the announcement of certain events (De Bondt and Thaler, 1985). Thus, the performance measured in a short-term event study does not always reflect underlying firm performance reliably and does not predict future performance. This thesis focuses on the long-term performance of the acquirer after an international acquisition and the influence of cultural board diversity on this performance. By focusing on the long-term, it becomes clear if the acquiring company was able to integrate the two entities properly and capture the possible synergies. A methodology commonly used in the finance and business literature to capture the long-term performance is the ‘buy-and-hold abnormal returns’ (BHAR) methodology (Barber and Lyon, 1997). This methodology focuses on the long-term stock returns of a company after a certain event to precisely measure investor experience. In this thesis, the BHAR-methodology as used by Chakrabarti et al. (2009) will be closely followed in testing the hypotheses. The methodology utilized in this thesis distinguishes itself from the methodology used by Chakrabarti et al. (2009) by including firm-level variables as well, where Chakrabarti et al. (2009) highlight the role of country-level variables on long-term stock performance only. The used methodology indicates the excess return over the market portfolio an investor would generate if he bought the shares of the acquiring company in the month of the acquisition, and hold them for 36 months. The BHAR over a 36 months’ time window is calculated by compounding the monthly returns of the acquiring firm’s stock and the monthly returns of the market index of this firm’s country and subtracting the return on the market from the return on the acquiring firm’s stock. So, the BHAR methodology measures the total return from a buy-and-hold strategy in which a share of the acquiring company is purchased at the end of the month the acquisition became effective, and held for a three-year period.
20 They propose an alternative measure which accounts for the dependence of event-firm abnormal returns, namely the calendar-time portfolio returns (CTAR) measure. However, in this thesis, a multi-country sample is being used which reduces the likelihood of cross-sectional dependence. Furthermore, by using year- and firm fixed effects, cross-sectional dependence is partially accounted for (Chakrabarti et al., 2009). Besides that, the CTAR measure does not lend itself for measuring the impact of certain variables, like cultural distance and international board diversity, on long-term stock performance.
A common problem in cross-country performance analysis of acquisitions is the possible presence of some country-level variables that are hard to control for. To minimize this problem, a clustered regression with robust standard errors is used in this thesis. By doing so, it accounts for clustering within the acquirer countries. Furthermore, target country fixed-effects are used. In this way, there is being controlled for certain characteristics of the target countries, which is of particular importance in this thesis since the majority of the target companies in this sample is headquartered in one country, namely, the United States of America. Besides using target country fixed-effects, year fixed-effects are used as well. Year fixed-effects are needed to control for time-related factors. In this thesis, these time-time-related factors would be mostly time-related to the financial crisis the world suffered in the period from 2007 to 2009.
To test the hypotheses, six different models are used. The first hypothesis of this thesis is concerned with the effect of cultural distance between acquirer and target country on long-term acquisition performance. A negative effect is expected. To test if this hypothesis is true, the following regression model is used:
𝐵𝐻𝐴𝑅36𝑖 = 𝛼 + 𝛽1 ∗ 𝐶𝐷𝑘𝑙 + 𝛽2 ∗ 𝐵𝑜𝑎𝑟𝑑𝑎𝑔𝑒𝑖+ 𝛽3 ∗ 𝐵𝑜𝑎𝑟𝑑𝑠𝑖𝑧𝑒𝑖
+ 𝛽4 ∗ 𝐹𝑖𝑟𝑚𝑠𝑖𝑧𝑒𝑖+ 𝛽5 ∗ 𝐹𝑖𝑟𝑚𝑎𝑔𝑒𝑖+ 𝛽6 ∗ 𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠𝑙
+ 𝛽7 ∗ 𝐸𝐷𝑘𝑙 + 𝛽8 ∗ 𝐵𝑖𝑙𝑎𝑡𝑒𝑟𝑎𝑙𝑘𝑙+ 𝛽9 ∗ 𝐺𝐷𝑘𝑙+ 𝐹𝐸𝑡𝑐+ 𝛾𝑡+ 𝜀𝑖
(6)
Where BHAR36i is the cumulative 36 month buy-and-hold abnormal return of acquirer firm
i, CDkl is the cultural distance between acquirer country k and target country l, Boardagei is the
average age of the executive board of acquirer company i, Boardsizei is the size of the executive
21
Bilateralkl displays the economic synergies between acquirer country k and target country l, GDkl
is the natural logarithm of the geographic distance between acquirer country k and target country
l, FEtc are the target-country fixed-effects, and 𝛾𝑡 are the year fixed-effects.
To test whether cultural diversity within the executive board of the acquiring company has a positive effect on long-term acquisition performance, as stated in hypothesis 2a, a variable for cultural diversity is added to the regression:
𝐵𝐻𝐴𝑅36𝑖 = 𝛼 + 𝛽1 ∗ 𝐶𝐷𝑘𝑙 + 𝛽2 ∗ 𝐶𝐷𝐼𝑉𝑖+ 𝛽3 ∗ 𝐵𝑜𝑎𝑟𝑑𝑎𝑔𝑒𝑖
+ 𝛽4 ∗ 𝐵𝑜𝑎𝑟𝑑𝑠𝑖𝑧𝑒𝑖+ 𝛽5 ∗ 𝐹𝑖𝑟𝑚𝑠𝑖𝑧𝑒𝑖 + 𝛽6 ∗ 𝐹𝑖𝑟𝑚𝑎𝑔𝑒𝑖
+ 𝛽7 ∗ 𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠𝑙+ 𝛽8 ∗ 𝐸𝐷𝑘𝑙 + 𝛽9 ∗ 𝐵𝑖𝑙𝑎𝑡𝑒𝑟𝑎𝑙𝑘𝑙 + 𝛽10 ∗ 𝐺𝐷𝑘𝑙+ 𝐹𝐸𝑡𝑐+ 𝛾𝑡+ 𝜀𝑖
(7)
Where CDIVi is the cultural diversity within the executive board of acquiring company i.
In the third model, an interaction term is added to see if the positive effect of cultural diversity increases as the cultural distance between the acquirer and the target country increases, as stated in hypothesis 2b. This leads to the following regression model:
𝐵𝐻𝐴𝑅36𝑖 = 𝛼 + 𝛽1 ∗ 𝐶𝐷𝑘𝑙 + 𝛽2 ∗ 𝐶𝐷𝐼𝑉𝑖+ 𝛽3 ∗ 𝐶𝐷𝑑𝑢𝑚𝑚𝑦 + 𝛽4 ∗ 𝐶𝐷𝐼𝑉𝑖∗ 𝐶𝐷𝑑𝑢𝑚𝑚𝑦 + 𝛽5 ∗ 𝐵𝑜𝑎𝑟𝑑𝑎𝑔𝑒𝑖 + 𝛽6 ∗ 𝐵𝑜𝑎𝑟𝑑𝑠𝑖𝑧𝑒𝑖+ 𝛽7 ∗ 𝐹𝑖𝑟𝑚𝑠𝑖𝑧𝑒𝑖+ 𝛽8 ∗ 𝐹𝑖𝑟𝑚𝑎𝑔𝑒𝑖 + 𝛽9 ∗ 𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠𝑙+ 𝛽10 ∗ 𝐸𝐷𝑘𝑙 + 𝛽11 ∗ 𝐵𝑖𝑙𝑎𝑡𝑒𝑟𝑎𝑙𝑘𝑙 + 𝛽12 ∗ 𝐺𝐷𝑘𝑙+ 𝐹𝐸𝑡𝑐+ 𝛾𝑡+ 𝜀𝑖 (8)
22 𝐵𝐻𝐴𝑅36𝑖 = 𝛼 + 𝛽1 ∗ 𝐶𝐷𝑘𝑙 + 𝛽2 ∗ %𝑓𝑟𝑜𝑚𝑇𝐶𝑖+𝛽3 ∗ 𝐵𝑜𝑎𝑟𝑑𝑎𝑔𝑒𝑖 + 𝛽4 ∗ 𝐵𝑜𝑎𝑟𝑑𝑠𝑖𝑧𝑒𝑖+ 𝛽5 ∗ 𝐹𝑖𝑟𝑚𝑠𝑖𝑧𝑒𝑖 + 𝛽6 ∗ 𝐹𝑖𝑟𝑚𝑎𝑔𝑒𝑖 + 𝛽7 ∗ 𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠𝑙+ 𝛽8 ∗ 𝐸𝐷𝑘𝑙 + 𝛽9 ∗ 𝐵𝑖𝑙𝑎𝑡𝑒𝑟𝑎𝑙𝑘𝑙 + 𝛽10 ∗ 𝐺𝐷𝑘𝑙+ 𝐹𝐸𝑡𝑐+ 𝛾𝑡+ 𝜀𝑖 (9)
Where %fromTCi is the percentage of members of the executive board of acquiring firm i
coming from the target country. As the cultural distance between acquirer and target increases, it is likely the liability of foreignness will as well. Therefore, to test hypothesis 3b, the following regression is conducted: 𝐵𝐻𝐴𝑅36𝑖 = 𝛼 + 𝛽1 ∗ 𝐶𝐷𝑘𝑙 + 𝛽2 ∗ %𝑓𝑟𝑜𝑚𝑇𝐶𝑖+ 𝛽3 ∗ 𝐶𝐷𝑑𝑢𝑚𝑚𝑦 + 𝛽4 ∗ %𝑓𝑟𝑜𝑚𝑇𝐶𝑖∗ 𝐶𝐷𝑑𝑢𝑚𝑚𝑦 + 𝛽5 ∗ 𝐵𝑜𝑎𝑟𝑑𝑎𝑔𝑒𝑖 + 𝛽6 ∗ 𝐵𝑜𝑎𝑟𝑑𝑠𝑖𝑧𝑒𝑖+ 𝛽7 ∗ 𝐹𝑖𝑟𝑚𝑠𝑖𝑧𝑒𝑖 + 𝛽8 ∗ 𝐹𝑖𝑟𝑚𝑎𝑔𝑒𝑖 + 𝛽9 ∗ 𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠𝑙+ 𝛽10 ∗ 𝐸𝐷𝑘𝑙 + 𝛽11 ∗ 𝐵𝑖𝑙𝑎𝑡𝑒𝑟𝑎𝑙𝑘𝑙 + 𝛽12 ∗ 𝐺𝐷𝑘𝑙+ 𝐹𝐸𝑡𝑐+ 𝛾𝑡+ 𝜀𝑖 (10)
Finally, both cultural board diversity and the percentage of board members from the target country are included in the model, leading to the following regression:
𝐵𝐻𝐴𝑅36𝑖 = 𝛼 + 𝛽1 ∗ 𝐶𝐷𝑘𝑙 + 𝛽2 ∗ 𝐶𝐷𝐼𝑉𝑖+ 𝛽3 ∗ %𝑓𝑟𝑜𝑚𝑇𝐶𝑖 + 𝛽4 ∗ 𝐵𝑜𝑎𝑟𝑑𝑎𝑔𝑒𝑖 + 𝛽5 ∗ 𝐵𝑜𝑎𝑟𝑑𝑠𝑖𝑧𝑒𝑖 + 𝛽6 ∗ 𝐹𝑖𝑟𝑚𝑠𝑖𝑧𝑒𝑖 + 𝛽7 ∗ 𝐹𝑖𝑟𝑚𝑎𝑔𝑒𝑖+ 𝛽8 ∗ 𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠𝑙+ 𝛽9 ∗ 𝐸𝐷𝑘𝑙 + 𝛽10 ∗ 𝐵𝑖𝑙𝑎𝑡𝑒𝑟𝑎𝑙𝑘𝑙+ 𝛽11 ∗ 𝐺𝐷𝑘𝑙+ 𝐹𝐸𝑡𝑐+ 𝛾𝑡+ 𝜀𝑖 (11)
4. Results
The results of the regressions are presented in this section. The overall long-term performance of the firms in the sample will be discussed, followed by the results of the various regression analyses conducted to test the hypotheses.
4.1 Multivariate clustered regression
23 negative median of the BHAR in the first 30 months after the acquisition. Only the median of the BHAR after 36 months is positive. Furthermore, the mean BHAR after 36 months is the only one slightly significantly different from zero. What also attracts attention, is that the means are positive throughout the whole 36 month period, while the medians are negative for most of the years. This indicates that the gains by the ‘winners’ are bigger than the losses of the ‘losers’.
Table 3 presents the results of the regression of long-term performance on various independent variables. The dependent variable in this regression is the buy-and-hold abnormal return of acquiring companies over 36 months. The explanatory variables are cultural board diversity, cultural distance, the percentage of members from the target country and the control variables. The variables used in the regression analysis have been discussed in the previous section, and are also presented in summary form in Appendix B. In all of these regressions, effective year and target country fixed-effects are used to control for all time-related factors, like the financial crisis, and unknown target country-specific variables that are hard to control for, besides the ones included as control variables.
Table 3 presents six models. The dependent variable in each of these models is the 36-month BHAR of the acquiring company. The first hypothesis predicts that cultural differences acquirer and target country negatively affect long-term acquisition performance. Model 1 shows that the cultural distance variable is not significant. This means that cultural differences between acquirer and target country do not significantly affect the long-term acquisition performance of the firms in this sample and thus, the regressions provide no evidence for hypothesis 1. The only variables significant in this model are board age, the openness of the target country, and geographic Table 2 Descriptive statistics for the ‘Buy-and-hold-abnormal-return’ following the acquisition
BHAR 36 BHAR 30 BHAR 24 BHAR 12
24 distance. Board age is highly significant in all of the models. The results show that board age is significantly negatively related to long-term acquisition performance. Thus, the older the board, the worse the firm performs in international acquisitions. Furthermore, the model shows a positive relationship between geographic distance and acquisition performance. This means that the acquisition performance of the firms in the sample increases as the distance between the acquirer and the target country increases. Lastly, limited evidence is found for the positive effect of openness of the target country on international acquisition performance.
The second model includes the cultural board diversity variable. As predicted in hypothesis 2a, having a culturally diverse executive board is beneficial for acquiring firms in international acquisitions. The cultural diversity variable is statistically and economically significant, as acquiring firms’ abnormal returns significantly increase with cultural diversity in executive boards after an international acquisition. This effect is even stronger as cultural distance between acquirer and target country increases, as visible in model 3. This model shows that besides the main effect of cultural board diversity, an interaction effect between cultural board diversity and cultural distance is also present. This means that in the top acquisitions regarding cultural differences between acquirer and target, culturally diverse boards added even more value. Thus, firms in the sample who acquired a firm in a culturally different country, reaped more benefits from having a culturally diverse board, as predicted by hypothesis 2b. Thus, both hypothesis 2a and 2b are supported.
26 remains statistically and economically significant, thus providing additional evidence for hypothesis 2b, and the variable representing the percentage of members from the target firm’s country remains insignificant.
4.2 Robustness tests
To verify the robustness of the results, additional regressions are conducted. These regressions use an alternative specification of long-term performance. The dependent variable is the 30-month BHAR of the acquiring company instead of the 36 month BHAR, as proposed by Chakrabarti et al. (2009). Table 4 presents the outcomes of these regressions. This table presents similar results as table 3. Board age is highly significant in all of the models, geographic distance remains significant, cultural board diversity positively influences long-term acquisition performance and this effect is greater if an acquisition is characterized by a high cultural distance between acquirer and target, and having board members from the target firm’s country is more beneficial for firms acquiring culturally distant targets. Thus, the robustness tests show that the results of this thesis are robust.
5. Discussion
This section discusses the findings as reported in the previous section. In general, the sample firms performed well in the long run after an international acquisition. The average 36-month buy-and-hold abnormal return is positive and significant. However, the results show that the median BHAR is negative in the first 30 months following the acquisition. This indicates that although most firms manage to capture value in these acquisitions in the long run, it might take some time to successfully integrate the two entities and start reaping benefits from the acquisition. These findings are in line with the findings of Chakrabarti et al. (2009). Regression analysis provided evidence of the effect of several variables, on country and firm level, on the long-term acquisition performance of the firms in the sample. These variables are discussed below.
5.1 Cultural distance
28 integration due to difficulties in knowledge exchange (Lin and Germain, 1998), lower commitment and cooperation by the employees of the acquired firm (Very et al., 1996), differences in administrative routines between cultures leading to misunderstanding about assignments (Heiman et al., 2008; Heiman and Nickerson, 2004), and finally, more day-to-day operating conflicts may arise (Jemison and Sitkin, 1986). Thus, one would expect cultural distance to influence the performance of international acquisitions negatively. The results provide no evidence for an adverse effect of cultural distance on long-term international acquisition performance. This could mean that acquirers are aware of the possible difficulties arising because of cultural differences in international acquisitions. Therefore, the process of selecting acquisition targets of the acquirer is likely to be more strict. This means that acquirer firms only go through with acquisitions characterized by a high cultural distance if this deal has substantial economic potential (Aguilera et al., 2004; Nahata et al., 2014).
Besides challenges, cultural distance could provide some opportunities as well. Chakrabarti et al. (2009) argued that acquiring firms in culturally distant countries could provide the acquiring firm access to unique and potentially valuable capabilities. Furthermore, culturally distant acquisitions could break rigidities and therefore enhance innovation and learning. Another possible positive effect is found by Goulet and Schweiger (2006). They state that managers are more predisposed to manage cultural differences in acquisitions characterized by a high cultural distance.
In conclusion, it seems evident that cultural distance will have an impeding effect on international acquisition performance. However, the results do not show such a negative effect. Reasons for this could be the increased awareness among managers in the case of culturally distant acquisitions which lead to better due diligence. Besides awareness, culturally distant acquisitions could also provide unique and valuable access to resources or alter the mindset of the acquiring managers. These factors could offset the negative implications of cultural distance for international acquisition performance. This seems the case in this thesis’s sample, were no significant negative effect is found for cultural distance on long-term international acquisition performance.
5.2 Cultural board diversity
29 international acquisition performance was hypothesized. The literature provided several reasons for the positive effects of diversity within groups. These reasons are the higher absorptive capacity of diverse groups (Reus and Lamont, 2007), the access to a greater pool of task-relevant knowledge, skills and abilities (Rivas, 2012), more knowledge on different cultures, needed for international success (Alon and Higgins, 2005), the higher level of creativity and problem-solving capabilities (Dutton and Duncan, 1987), culturally diverse groups are less subject to the domestic myopia concept (Barkema and Vermeulen, 1998), it could generate trust among a firm’s product and geographic unit managers (Kim and Mauborgne, 1991), and the increased socio-cognitively complexity, leading to a higher ability to cope with changing international market opportunities and handling conflicts and paradoxes related to international acquisition (Murtha et al., 1998).
The results of the regressions are in line with the theories proposed by these scholars. The cultural diversity index is significant in the main regressions and the robustness tests. Thus, it seems that having members of different cultural backgrounds on the executive board is beneficial for firms in acquiring foreign companies. The executive board is responsible for implementing strategy and handling day-to-day operations (Fama and Jensen, 1983). In the case of acquisitions, this means they are concerned with the integration process after the acquisition is effective. The results show that cultural diversity is beneficial in this process. Thus, it seems that the benefits provided by cultural diversity could help firms overcome the difficulties related to international acquisitions.
Cultural board diversity and cultural distance
The results also provide evidence for cultural board diversity being more beneficial as cultural distance increases. Thus, as the complexity of an acquisition increases due to greater differences in national cultures between the acquirer and the target, the more beneficial it is for acquiring companies to have an executive board composed of members of different cultural backgrounds. Reason for this could be that diverse board are more creative in problem-solving and better able to cope with complex environments (Dutton and Duncan, 1987; Murtha et al., 1998) 5.3 Executive board members from target country
30 firm engaging in international acquisitions. These board members could help the acquiring firms overcome the liability of foreignness. This means that they could provide the firm with knowledge of the target country’s market (Zaheer and Mosakowski, 1997) and useful connections in the target country (Tihanyi et al., 2000). Furthermore, it could help the acquirer overcome difficulties regarding differences in language between the acquirer and the target (Piekkari et al., 2005). The results, do not provide sufficient evidence for this hypothesis. However, highly significant evidence is found for a positive interaction effect between having executive board members from the target firm’s country and cultural distance. This implies that in the case of an acquisition characterized by a high cultural distance between target and acquirer, executive board members could provide the acquiring company with knowledge on the cultural characteristics of the target firm’s country, and how to deal with the people and environment of that country. The liability of foreignness problem is likely to be bigger in the case of a culturally distant acquisition. Executives from the target country could provide the acquiring company with the connections needed to succeed in that country or help the acquiring firm overcome difficulties related to language.
6. Conclusion
6.1 SummaryInternational acquisitions play a major role in the field of international business and gain much attention from scholars. Many studies have tried to determine the performance effects of engaging in international acquisitions and what triggers international acquisition performance. Another field within business studies that gains increasing attention is board diversity and its role in relation to firm performance. This thesis tries to contribute to these areas of literature by focusing on the long-term performance effects of international acquisitions and the moderating roles of cultural distance and cultural board diversity.
31 a foreign acquisition target. The thesis provides evidence for the positive performance effects of having a culturally diverse executive board in international acquisitions. Culturally diverse executive boards seem better able to tackle the difficulties coming with international acquisitions and seem better able to help the company reaping the benefits of such acquisitions. This effect is even stronger if the acquisition is characterized by a high cultural distance between acquirer and target country. This implies that cultural knowledge within executive boards could help the acquiring firm understand the culture of the target firm’s nation, and provide them with the needed knowledge and capabilities required for coping with cultural differences and preventing cultural conflicts. Furthermore, the results show that having executives from the target country is beneficial if the acquirer and target are highly culturally different.
6.2 Implications for practice
The results of this thesis could have an important effect on the selection criteria used to recruit board members both by international firms as human resource professionals. Firms willing to expand their business to foreign markets by acquiring a foreign company could take diversity into account while selecting new members for the executive board and take into consideration the candidate’s cultural origin to gain the relevant cultural knowledge of the most important markets a firm is operating in, or are planning on doing so. In this way, the knowledge of several cultural regions could become an asset for the company. Besides, if the firm is planning on acquiring a company in a culturally distant country, it could also recruit board members from the potential target’s country to gain the needed knowledge of, and connections in the target country.
6.3 Limitations
32 to be reasonably stable over the years. Fourthly, this thesis does not look into other characteristics of executives that could also indicate cultural knowledge or affect an executive’s approach in dealing with other cultures, such as international work or study experience. Lastly, this thesis is likely to suffer from a selection bias. It is probable that only well-established and profitable firms will engage in a risky event such as an international acquisition. Only the acquisitions that are predicted to be successful are undertaken. Therefore, acquisitions between certain countries are more likely. So, the sample might be biased to certain combinations of acquirer and target countries.
33
References
Agrawal, A., Jaffe, J., and Mandelker, G., 1992, The Post-Merger Performance of Acquiring Firms: A Re-examination of an Anomaly, The Journal of Finance 47, 1605-1621.
Agrawal, A., and Walkling, R. 1994. Executive careers and compensation surrounding takeover bids. Journal of Finance, 49: 985-1014.
Aguilera, R., Dencker, C., and Escandell, X. 2004. Left at the altar: An institutional analysis of global merger and acquisition announcements in the 1990s. Working Paper, College of Business, University of Illinois at Urbana-Champaign
Alon,I., and Higgins, J., 2005, Global leadership success through emotional and cultural intelligences, Business Horizons 48, 501-512.
Amason, A. C. and Sapienza, H. J., 1997, The Effects of Top Management Team Size and interaction Norms on Cognitive and Affective Conflict, Journal of Management 23, 495-516.
Angwin, D. 2001. Mergers and acquisitions across European borders: National perspectives on preacquisition due diligence and the use of professional advisors. Journal of World Business, 36(1): 32.–57.
Banker, R. D., Chang, H. H., and Cunningham, R. 2003. The public accounting industry production function. Journal of Accounting & Economics, 35: 255-281.
Bantel, K.A. and Jackson, S.E., 1989, Top management and innovations in banking: does the composition of the top team make a difference?, Strategic Management Journal, Vol. 10 No. 1, pp. 107-124.
Barber, B. and Lyon, J., 1997, Detecting long-run abnormal stock returns: The empirical power and specification of test statistics, Journal of Financial Economics 43, 341-372.
Barkema, H. G., Bell, J., and Pennings, J., 1996, Foreign entry, cultural barriers, and learning, Strategic Management Journal 17, 151-166.
Barkema, H. G. and Vermeulen, F., 1998, International expansion through start-up or acquisition: a learning perspective, Academy of Management Journal 41, 7-26.
Barney, J.B., 1991. Firm resources and sustained competitive advantage. Journal of Management, 17: 99.–120. Blau, P.M., 1977. Inequality and Heterogeneity: A primitive theory of social structure. United States: Free Press. Cannella, A., and Hambrick, D., 1993. Effects of executive departures on the performance of acquired firms.
Strategic Management Journal, 14: 137-152.
Capron, L., Dussauge, P., and Mitchell,W., 1998. Resource redeployment following horizontal acquisitions in Europe and North America, 1988-1992. Strategic Management Journal, 19: 631-661.
Chakrabarti, R., Gupta-Mukherjee, S., and Jayaraman, N., 2009, Mars–Venus marriages: Culture and cross-border M&A, Journal of International Business Studies 40, 216-236.
Chen,G., Crossland, C., and Huang, S., 2016. Female board representation and corporate acquisition intensity. Strategic Management Journal 37:303–313.
Chen, M. J.,and MacMillan, I. C., 1992, Non response and delayed response to competitive moves: The roles of competitor dependence and action irreversibility. Academy of Management Journal, 35, 359–370 Cohen, W., and Levinthal, D., 1990, Absorptive Capacity: A New Perspective on Learning and Innovation,
Administrative Science Quarterly 35, 128.
Datta, D., 1991, Organizational fit and acquisition performance: Effects of post-acquisition integration, Strategic Management Journal. 12, 281-297.
Datta, D. and Puia G., 1995, Cross-Border Acquisitions: An Examination of the Influence of relatedness and Cultural Fit on Shareholder Value Creation in U.S. Acquiring Firms, Management International Review, 35, 337-359.
Datta, D., Pinches, and., & Narayanan, V., 1992. Factors influencing wealth creation from mergers and acquisitions: A meta-analysis. Strategic Management Journal, 13(1), 67–84.
DePamphilis, D., 2008, Mergers, Acquisitions, And Other Restructuring Activities (Elservier/Academic Press, Amsterdam).
De Bondt, W., and Thaler, R., 1985, Does the Stock Market Overreact?, The Journal of Finance 40, 793-805. De Long, D., and Fahey, L., 2000, Diagnosing cultural barriers to knowledge management., Academy of
Management Perspectives 14, 113-127.
Dutton, J. and Duncan, R., 1987, The creation of momentum for change through the process of strategic issue diagnosis, Strategic Management Journal, 8, 279-295.
Fama, E., 1998. Market Efficiency, Long-term Returns, and Behavioral Finance. Journal of Financial Economics 49, 283-306.
