Political Ideologies of CEOs and Foreign Direct Investments

Political Ideologies of CEOs and Foreign Direct Investments

How the political leaning of executives influences internationalization decisions

Florent Islami

Master Dissertation

M. Sc. International Business and Management

June 18

_{, 2018}

University of Groningen, Netherlands

Faculty of Economics and Business

Department of Global Economics and Management

Supervisor: Dr. Esha Mendiratta

Co-Assessor: Dr. Rudi de Vries

S3496031

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Political Ideologies of CEOs and Foreign Direct Investments

How the political leaning of executives influences internationalization decisions

Abstract

This study examines the relationship between the political ideology of chief executive officers (CEO) and their cross-border diversification decisions. Specifically, I propose that the political orientation of an executive will affect his or her decision of foreign direct investments (FDI) based on the political leaning of the government of the host country. It is hypothesized that executives will show a tendency to choose countries with an administration of the same direction, such that liberal CEOs will invest in countries with left-leaning governments and conservative CEOs will more like engage with right-leaning governments. The relation between an executive’s orientation and the country he or she chooses to engage in will be affected by internationalization decisions of other companies, in the sense that substantial foreign direct investments towards a specific country will weaken the political ideology effect. This study considers 147 CEOs of S&P 500 listed US companies who were engaged in 424 cross-border mergers and acquisitions between 2013 and 2017 and measures their political ideology based on their monetary contributions towards the Republican or the Democratic Party between 2003 and 2018. Although the results do not provide a clear answer, they indicate that political ideology is a weak predictor for the direction of FDI engagements and has a reverse effect, meaning that liberal CEOs are shown to favor right-leaning countries and vice versa, which is again amplified by global FDI trends and movements.

Keywords: Chief Executive Officer, Upper Echelon Theory, Foreign Direct Investment,

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Table of Content

2.2. Foreign Direct Investments ... 11

2.3. Host Country... 13

3. Methodology ... 16

3.1. Overview and Sample ... 16

3.2. Variables ... 17

3.3. Estimation Model ... 19

4. Results ... 20

4.1. Assumptions and Transformations ... 20

4.2. Descriptive Statistics and variable correlations ... 21

4.3. Binominal logistic regression results and hypothesis testing ... 22

4.4. Robustness Check ... 24

5. Discussion ... 25

5.1. Discussion of the analysis results ... 25

5.2. Limitations and Recommendations ... 27

6. Conclusion ... 28

Bibliography ... 29

Appendices ... 38

A. Description of Variables ... 38

B. Binominal Logistic Regression Results ... 39

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List of Abbreviations

CEO Chief Executive Officer

CSR Corporate Social Responsibility

SPSS Statistical Package of the Social Sciences

FDI Foreign Direct Investment

UET Upper Echelons Theory

et al. Et alii/aliae/alia

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1. Introduction

The question to what extent executive managers affect corporate outcomes is subject of research for almost 70 years now and can be dated back to Suna Carlson’s book Executive Behavior which is seen as “the first systematic study of the work of top managers ever made” (Tengblad, 2000). Although his observations were based on Swedish companies only, the study’s methodological approach and well-conceived theories provide a valid insight on CEO behavior as well as their interaction with their environment and is a critically acclaimed piece of work to this day (Stewart, 1996). Still, the relationship between the CEO’s role and impact on the company’s direction remains a highly discussed topic in business literature.

Many new approaches have been used since then trying to explain and predict the decisions of executives and corporate outcome. According to theorists of the neo-institutional approach, different forms of institutional pressures are limiting the range of options for CEOs to a broad extend (Hotho and Pedersen, 2012). As firm outcomes are often embedded in between those isomorphic constrains, the individual contribution of executives is assumed to be small (Spencer and Gomez, 2011). Others, on the other hand, suggest that executives make use of their position of power. Based on the commonly known Agent Theory, executives prioritize pursuing goals over the interests of shareholders as they have a substantial information advantage over them (Jensen, 1986 in: Dhir and Mital, 2012; Aguilera and Jackson, 2003).

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While scholars have shown that the companies’ corporate social responsibility decisions (Chin et al., 2013), tax avoidance strategies (Christensen et al., 2015), compensation decisions (Chin and Semadeni, 2017) or corporate policy orientations (Hutton et al., 2014) are influenced by the political ideology of their CEOs, the focal study aims to examine to what extend political preferences predict the location decision of foreign direct investments (FDI).

Internationalization decisions have so far been commonly analyzed and evaluated from an economic perspective within the International Business Literature. Entering new markets, accessing new resources, or gaining competitive advantages are among the most commonly examined motives for FDI engagements (Dunning, 2000). While Elnahas and Kim (2017) have examined the extent to which the political ideology changes the method as well as the likelihood of engaging in cross-border acquisitions, this study focuses on the location of the investment. Specifically, this study raises the question whether CEOs have a tendency to engage in merger

and acquisition deals in countries with a government that has a value-congruent political leaning. The research of this thesis is based on 424 cross-border M&A deals conducted by S&P

500 listed companies in America between 2013 and 2017 whose chief executive officer has actively contributed to US-American parties, as the political party spectrum of the USA is mainly composed of the Democratic Party and the Republican Party, which represent a liberal and a conservative ideology, respectively. As political donations are used as a proxy for identifying the position of a CEO on the left-right spectrum by many of the studies mentioned above, the focal study will apply a similar approach.

The research of this thesis contributes to the current body of research around the upper echelons and how their individual value configuration affects or even predicts corporate outcomes that are usually considered among performance arguments, such as resource allocation, transaction cost minimization, and efficiency maximization. Finding support for the theoretical claims of this study may strengthen the explanation of the relationship between executives and firm outcomes and help to critically assess the reasoning behind CEO decisions.

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2. Theoretical Framework

2.1. The CEO

Individual values of a CEO and their influence on decision making

Usually, the body of research behind corporate performance and firm outcomes relies on data provided by economic measures, such as market or industry analysis. The role of personnel influences, especially by top level management, has drawn only little attention (Bertrand and Schoar, 2003). That view has drastically changed after Hambrick and Mason (1984) proposed a new theoretical framework focusing on the influential role of the upper echelons of a firm. The Upper Echelon Theory (UET) provided novel insights on the importance of executives and their influence on corporate outcomes in terms of strategies, governance policies and firm performance (Cannella and Holcomb, 2005). The Upper Echelon Theory will therefore be the focal theoretical framework for this study.

The basic assumption of the UET suggests that organizational outcomes are not solely driven by economic factors but also by “the values and cognitive bases of powerful actors in the organization” (Hambrick & Mason, 1984, p. 193). Aside various objective measures, the results of executives’ decision-making processes are heavily affected by how he or she perceives the environment and what his or her personal dispositions are.

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The personal and professional experiences, beliefs and values of executives pose strong effects on how the information is processed and how eventually goals and problems will be approached and solved. When it comes to the selection and interpretation of the available stimuli, scholars believe that the personal values play a heavy role during the process. The motivated cognition, which has its roots in social psychology, describes how individuals seek information that are consistent with their beliefs and values (Dunning, 1999).

Although CEOs do not single-handedly determine the outcomes of a company, they pave the way for a very specific course towards a clear direction. As those decisions heavily affect almost every level of the company, the organizational outcome is assumed to reflect the values and beliefs of an executive. While it has been shown that the values of a CEO have a strong impact on a company’s CSR initiatives and tax avoidance strategy (cf. Chin et al., 2013, Christensen et al., 2015, Francis et al., 2016), this study examines whether the theory holds true for internationalization decisions.

Value manifestation of political ideologies

As many value scholars suggest, the political orientation of individuals provides a very deep and accessible insight into their values and beliefs way beyond their voting behavior (cf. Schwartz, 1996; Feldman, 2003; Chin et al., 2013; Gupta and Wowak, 2016). This relationship between political orientation and personal values has long been examined, supporting the notion that “values are a major source of structure for political attitudes.’’ (Feldman, 2003, p. 477).

The political dimension of liberalism and conservatism is often chosen as a valid predictor of individual attitudes (Jost, 2006) and is widely suggested as a measurement option for the value sets of executives, as it represents “individuals’ core beliefs” to the broadest extent (Chin et al., 2013, p. 200). In respect to the Upper Echelon Theory, it can be assumed that the values and ideologies of individuals are embedded in their behavior, not only altering their perception but also channeling a certain set of actions.

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suggestions have been made for the political orientation of an individual, which are also most likely “formed early in life, often through transmission from parents to children” (Burris, 2001, p. 378). In the following segment, I will distinguish the different value sets of liberals and conservatives based on findings from a social and political psychology perspective.

Liberalism stems from the philosophic conviction of giving “primacy to the protection of basic Liberty”, going hand in hand with the principles of equality and democracy (Gutmann, 2001). For liberals, openness to experience, change and expression are important. They are generally optimistic to human nature, put emphasis on human dignity, the protection of the environment and of diversity (Stone, 2006; Graham, Haidt and Nosek, 2009). According to the findings of Haidt, Graham and Joseph (2009), the moral judgement of liberals stems mainly from two foundations: harm/care, referring to the protection of minorities and weak individuals and the avoidance of harm, and fairness/reciprocity, which refers to fair procedural treatment and justice. Conservatives, on the other hand, have a broader foundation, as they additionally consider hierarchical positions, the social group in which they exist and religious or traditional arguments.

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Conservatism, on the other hand, is defined by its “disposition and tendency to preserve what is established” and having an “opposition to change” (Neilson, 1958, p. 568 in: Jost et al., 2003, p. 342). In this sense, conservatives experience comfort in stable and predictable situations and are sensible to any disruption of the social order (Jost et al., 2008). As mentioned above, conservatives base their moral decisions on a broader foundation as they form their judgement upon the needs of their social group, the authoritarian hierarchy and religion and tradition-based considerations (Graham, Haidt and Nosek,

2009). The Ingroup foundation refers to the relationship of the individual to the group, by which conservatives value group affiliation, a high degree of loyalty and collective responsibilities. The authority foundation reflects the acceptance of authority and hierarchy and the degree of obedience and respect (Weber and Federico, 2013). For conservatives, collectives are naturally hierarchically ordered as they do not perceive social inequality as unjust (Jost et al., 2003). They not only see the status quo as legitimized but are also willing to defend it (Tetlock, 2000). This poses a major distinction between the two political extremes, given that equality is, figuratively speaking, a fundamental pillar of liberalism, since they strongly refuse inequality. The last argument on which conservatives base their moral judgement upon are considerations of purity/sanctity, which denotes “concerns about physical and spiritual contagion” and seeks justification through religious or traditional traits (Haidt, Graham and Joseph, 2009, p. 112). Especially in the US, conservatism is shown to be strongly related to faith and religious values (Miller, 1994 in: Jost et al., 2003).

In a business environment, conservative values are translated into a strong fear for losses and as well as a great aversion to ambiguity and uncertainty (Christensen et al., 2015). The tendency to avoid risks, at least when future incomes are concerned, is shown to be a key driver for strategic decisions of conservative CEOs (Jost et al., 2003). Outcomes are usually assigned to internal factors and less to environmental attributions, which explains why conservatives are very depreciative of high taxes, while at the same time support governmental promotion of

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“traditional notions of morality and social order” (Christensen et al., 2015, p. 1932). Given that conservatives highly favor free markets (accompanied by the absence of the government in business relations) financial stability and business needs, they are assumed to be more supportive of the shareholder-approach compared to liberals (Tetlock, 2000; Chin et al. 2013). This is in line with the findings by Gupta and Wowak (2017), who show that CEOs who have a conservative-leaning board tend to get higher payments, who attribute the firm performance directly to their executive, while liberals acknowledge the importance of external factors.

It has become clear that while liberals tend to base their decisions on fairness and harm concerns, conservatives base their judgement on a broader foundation, as it is shown in Figure 1. As liberals seem to have a narrower set of arguments when making a decision, their considerations on equality and protection are disproportionally stronger emphasized. Research has shown that implication of authority or social hierarchy play a much smaller role in their decision making. On the other hand, conservatives base their decisions on a broader foundation with almost equal weighting on each argument, implying that their considerations of fairness and protection are relatively smaller (Weber and Federico, 2013).

As it has been confirmed in many studies, the two ideologies are seen as “conflicting psychological portraits” which tend to drift apart the stronger the political conviction is (Tetlock and Mitchell, 1993). Assuming that values are channeled through the behavior of executives, this study proposes that CEOs prefer countries with an administration in correspondence to their own political beliefs. In a later section, this research will consider how and why those value considerations might affect an executive’s decision into choosing a value-congruent government.

2.2. Foreign Direct Investments

From a globalization perspective, foreign direct investments (FDI) are almost a necessity for every bigger company. A foreign direct investment can be broadly described as a cross-border transaction by a company of one country towards a company of another country. There is a broad array of tools on how to approach and enter foreign markets, depending on the corporate strategy as well as anticipated managerial control the company wants to gain over the new market or firm; ranging from franchising and licensing all the way to buying whole companies (Saggi, 1996).

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as a consolidation of two companies - either by combinations of two companies into one (merger) or by the acquisition of one company by another (“Mergers and Acquisitions - M&A”, n. d.). With a total value of $3.5 trillion and over 50,000 domestic and cross-national M&A deals worldwide, 2017 has exceeded the expectations, showing that M&A transaction have a substantial impact on today’s world economy (Baigorri, 2016; “M&A Statistics”, n. d.). Looking at cross-border M&A transactions alone, there have been 10725 deals worth $870 billion across all industry sectors last year (UNCTAD, 2017a; UNCTAD, 2017b).

Not only because of their success but also because of their high failure rate, cross-border mergers and acquisitions have been the focus of research of many studies, trying to find reasonable explanations for those observations (Martin, 2016). So far, internationalization decisions have been examined almost exclusively under strategic benefits and economic performance considerations. Based on the work of J.H. Dunning (1980), the conceptual framework he developed aims to explain the motives behind corporate internationalization (de Matías Batalla, 2015). According to his theoretical propositions, FDIs are mainly motivated by gaining ownership, location and internationalization advantages (Dunning, 1980). Those refer to accessing resources that ensure gaining a competitive advantage over other companies, entering in new and foreign markets and benefitting from synergies with the partnered/acquired company (Dunning, 2000). Thus, economic properties, such as exchange rates and market growth, are often weighted more heavily than institutional or even political factors (Yu and Walsh, 2010).

To shed light on foreign direct investments from a different perspective, Francis and colleagues (2009) acknowledge that:

“Historically, researchers have relied upon economic perspectives which suggest that firms choose strategies in attempt to achieve optimal solutions […]. However, when making investment decisions, firms face a multitude of uncertainties and are influenced by numerous and often conflicting information cues that do not always lend themselves to rational decision

making” (Francis et al., 2009, p. 566)

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more likely to make conservative financial decisions, such as preferring to engage in capital expenditures over foreign investments and choosing companies of the same industry instead of diversifying the assets. In line with previous studies, this thesis will continue looking at merger and acquisition deals and add special focus on cross-national transactions. M&As usually result in a high affiliation between focal and target company as well as the host country, as they must align their corporate practices and beliefs with their environment. Further, they seem to be sensitive towards national differences and cultural barriers which enhances the importance of an ideological fit to reduce investment uncertainty and risk (Davies et al., 2015).

2.3. Host Country

Political leaning of Governments

After examining the phenomena of how CEO characteristics find their way to influence expansion decisions of a company and vice versa, this section will discuss the properties of partisan governments and to what degree they are responsible for the policies which are considered by executives in diversification strategies. Parties, in this context, can be seen as a group of representatives of a certain mindset with mostly consistent answers to certain social problems and affairs.

The spectrum of left and right generally describes the distinction between political orientations; regardless of whether they are applied to individual positions or political parties on a national level. Even though the scale is different, the underlying values of the positions on this linear dimension remain very familiar. Values on the political left promote beliefs which are related to “freedom, equality, fraternity, rights, progress, reform and internationalism", while the political right supports "notions such as authority, hierarchy, order, duty, tradition, reaction and nationalism" (Heywood, 2015, p. 119).

Even though political attitudes are subject of change, parties usually occupy a certain position on the spectrum which corresponds to the values that have been discussed above and which usually represents the mindset of a subgroup of the society who identify with that party. When it comes to partisan distinction, famous Italian philosopher Noberto Bobbio suggests looking at social issues in order to ascribe ideologies to parties. He says: “I believe that the criterion most frequently used to distinguish between the left and the right is the attitude of real people in

society to the ideal of equality” (Bobbio, 1996, p. 60, italics added).

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unregulated markets can be a source for such inequality which eventually leads to social injustice and a negative impact on individual development (Heywood, 2005). Thus, governmental intervention is seen as a tool to fight social wrongs and promote the needs of the society.

Conservative parties, on the other hand (or in this case: side), perceive liberalists’ inequality as “hierarchical order” (Bobbio, 1996, p. 37). In line with the previous distinction on individual level, those parties value tradition, authority and love for one’s country, promoting the preservation of the current social and economic status or the restauration of the good old days. (Johnson, 2005b). Here, governmental intervention on economic affairs is relatively reluctant, as markets are believed to regulate themselves and taxation is especially in the US only a tool for boosting the economy, not enduring social equality (“Conservative vs. Liberal Beliefs”, 2005).

Parties, both as an independent entity as well as a part of the government, form the political institutions of a country and contribute to some degree to the institutional environment of a country (Boddy-Evans, 2017). But to what extent does a government affect the policies of its country so that an executives’ decision-making process would be affected? There is an unneglectable difference per se between a state and its government: while the state constitutes the beliefs and values which are broadly shared among a society, the elect administration is believed to have only little influence on any economic policies given their potential fluctuation and short presence (Skocpol, 1979 in: Murtha & Lenway, 1994). The idea that the governmental impact is negligible has since been challenged by a comprehensive study by Persson (2002), showing that political institutions indeed have a substantial impact on economic policies, to the extent that parliamentarian regimes can induce favored policies due to their majority position. Presidential regimes, on the other hand, are empirically associated with smaller governments which allows the president to occupy a power position and showing overall that there are considerable effects and changes induced by government parties.

As it has been mentioned above, liberal values are strongly associated with openness to change and experience and the refusal of inequality, while conservatives promote tradition, authority and social order (cf. Thorisdottir et al., 2007). Channeling those personal beliefs, corporate executives are presumed to make decisions which are not solely based on economic factors but also their values.

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uncertainty is lower towards the administration of the same side of the spectrum comparatively to an administration on the opposite side of the spectrum, all else equal. Knowing that policy uncertainty is shown to have a strong deterrent effect on foreign expansion (Henisz and Delios 2002), CEOs may show the tendency to choose countries whose governments have the same leaning as them. Further, politically consolidated people show the tendency to avoid exposure to opinions and values that are not conforming to their own (Frimer et al., 2017). Motyl (2016) suggests that individuals have a stronger sense of belonging when living in spaces where similar values are shared. Although his theory is based on the relationships in American neighborhoods, the general thought of it can be transferred to this study. As large cross-border acquisitions and mergers contain high risk and uncertainty and liberals (or conservatives) feel more comfortable and approved in a belief-confirming environment, they might tend to choose companies in left (right) leaning countries. Therefore, I suggest that:

Hypothesis 1: In cross-border mergers and acquisitions, liberal (conservative) CEOs will prefer countries whose government is leaning towards the left (right) side of the political

spectrum.

Imitative behavior in uncertain environments

As every cross-border engagement is associated with a multitude of uncertainties and risks, executives constantly seek additional information from their environment to reduce those risks and legitimize their decisions (Francis et al., 2009). Success and corporate performance of other companies are handy estimates for the potential of foreign markets, but detailed information is often difficult to obtain as they are rarely fully disclosed (Greve, 1998). Nonetheless, close observation of strategic decisions of companies in the same home-country environment act as a source of learning for the focal company. When facing foreign entry decisions, firms draw from those experiences of others (Guillén, 2003). Specifically, imitation is shown to take place among competitors, as they pose a way to cope with the risks of FDI decisions (Guler et al., 2002).

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Thus, competitive pressure of imitating FDI behavior increases, the higher the foreign investments towards a specific country are (Guler et al., 2002). This “fear of missing out” affects company executives from developed economies more than it affects those from emerging markets (Lagerberg, 2015).

Both uncertainty avoidance and missing out effects contribute to imitation pressures when making cross-border FDI decisions. The idea of executives imitating peers is not new, since Scharfstein and Stein (1990) have already observed that “under certain circumstances, managers simply mimic the investment decisions of other managers, ignoring substantive private information” (p. 466). In the context of this study, the imitational behavior is assumed to reduce seeking value-congruent environments. In other words, the weight personal orientation of an executive decreases the more foreign direct investments made by other companies flow towards a specific country. Thus, I propose:

Hypothesis 2: The relationship between the political orientation of a CEO and the tendency to acquire a company with a value-confirming government is moderated by mimetic pressures,

in that the more companies have invested in the same host country, the less do the personal values of the focal CEO matter.

3. Methodology

3.1. Overview and Sample

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3.2. Variables

Independent Variable: political ideology of the CEO

Given that both databases are provided by the same publisher of business information, all companies of my sample have a unique BvD-number which can be used to track specific information across the platforms. After setting my sample, Orbis provided me the relevant information on each executive who was in charge at the time where the deal was announced. In cases where it was unclear which CEO supervised the deal, other sources of information have been used, such as the company’s online presence, Bloomberg.com or LinkedIn.

To measure the political orientation of the CEOs and assign them an index on a continuous scale, I have tracked the CEO’s donations to political parties and candidates according to the services provided by the Center for Responsive Politics. In the US, the Federal Election

Commission (FEC) keeps record of every donation towards political candidates, parties or

Political Action Committees (PAC) above $200 and displays the full name, zip code and occupation of the donors. The CRP offers a platform called opensecrets.org which draws from that data and provides a user-friendly surface on which individual donations can be accessed easily. Using this data, I assigned each CEO an ideology index based on his or her donations in the past 15 years. Specifically, the calculation approach that has been used to assess the political orientation is drawn and adapted from previous studies that have measured the same variable (cf. Chin et al., 2013; Christensen et al., 2015):

𝐶𝐸𝑂 𝑂𝑟𝑖𝑒𝑛𝑡𝑎𝑡𝑖𝑜𝑛 𝐼𝑛𝑑𝑒𝑥 =(Donations towards Rep. −Donations towards Dem. ) + 1 Total amount donated + 1

The reported donation value towards the Republican Party or candidates was subtracted by amount of money donated towards the Democratic Party or candidates and divided that by the total amount donated. The value 1 was added to both numerator and denominator to avoid indices having the value of zero. Further, I added the value 1 to every CEO Index to avoid negative values. This way, every traceable CEO received a score between < 0 (very liberal) and 2 (very conservative).

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with or without his middle name initial. To confirm that the donor WEEKS, WENDELL was the same as WEEKS, WENDELL P and “both” were the CEO of Corning, I additionally checked for the state the individual was living in, the ZIP code, previous occupations according to his or her LinkedIn profile and other online sources if necessary.

Dependent Variable – Political Leaning of the host country government

The dependent variable of this study is the political leaning of the government of the host country at the time of the cross-border engagement. To track the position of the administration at the time, I will consult the Database of Political Institutions 2017 provided by the World

Bank Development Research Group as it is “one of the most cited databases in comparative

political economy and comparative political institutions” (Scartascini et al., 2018, Abstract). The DPI is a biennially published report that provides a magnitude of political information and tracks the electoral results as well as identifies and measures the ideological leaning of almost every country in the world at every election cycle. From this database, I will draw from one of their variables which differentiates governments between Left or Right, based on the “Party orientation with respect to economic policy, coded based on the description of the party in the sources” (Scartascini et al., 2018, p. 6). For this study, the small number of acquisitions whose host country’s government was labeled as Center have been excluded as a dichotomous categorization of the host country leaning between left-wing and right-wing not only improves the applicability of the model but also clarifies the interpretation of the results.

Moderator – Investment Imitation Pressure

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performance and success with other companies of the same peer group (Murray et al., 1997), the FDI inflows may induce mimetic effects which influence the decision making of the CEO. This approach is adapted from previous FDI studies in which investments were put into proportion with FDI decisions that were directed to the same country with respect to the change between the previous and focal year (Guillén, 2002).

Control Variables

To get a clearer picture of the effects of a CEO’s political orientation and increase its explanatory power, several control variables were included in the model which were all drawn from the Bureau van Dijk databases. First, the model controls for the industrial branch of the acquirer and the target. The distinction may be necessary as it is likely that an investment directed towards the same industry poses a lower uncertainty than buying a company of a different branch. Source for the industry indication is created by the BvD subsidiary Zephus which uses a combination of the classification systems US SIC and NACE relating to the sector and can be located in the database Zephyr as well. Next, firm size will be addressed as larger firms are assumed engage in more M&A deals and thus are more likely to invest towards a country which in line with the orientation the CEO, compared to smaller companies whose investments are more likely to follow economic factors to a relatively higher extend. The number of employees will be used as a proxy for firm size. Finally, prior host country experience has a direct influence on the foreignness and uncertainty faced by the CEO. The more engaged a company is in a foreign country, the higher is the familiarity towards that country and thus the lower the level of uncertainty becomes when facing an expansion decision (Zaheer, 1995). For this control variable, the total amount of wholly-owned subsidiaries in the target country have been counted. Since the focal database does not track the dates when exactly those subsidiaries were bought or build, it was assumed that the total difference of subsidiaries held between 2013 and 2017 is neglectable. Due to methodological reasons, the value 0.1 was added to the companies that had no subsidiaries listed. Gender will be also included as a control variable, as the discussion whether demographic characteristics impact corporate outcomes has been very divisive in Business literature (cf. Ferreira, 2015).

3.3. Estimation Model

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regression is the best fit for the requirements. Although this regression type is usually used to predict the likelihood of the presence or absence of an event (e. g. having or not having a heart attack), the study will adapt the premise by categorizing the dichotomous dependent variable into Right and Left. As logistic regressions are commonly used among studies in cross-border investment literature, a binominal logistic regression seems most appropriate for this study (Jain et al., 2015).

The logistic regression estimates the likelihood of an event in the form of the logarithm of the odds ratio, namely logit(𝜋_𝑖)=log 𝜋𝑖

1−𝜋𝑖, where 𝜋𝑖 represents the likelihood of investing in a

right-leaning government while 1-𝜋_𝑖 represents the likelihood of not investing right-leaning government and thus a left-leaning government (“Binary Logistic Regression”, n. d.). As a probability distribution, the formula can be expressed as:

𝑝(𝜋_𝑖) = 𝑒

𝑏0+𝑏1𝐺𝐸𝑁+𝑏2𝐼𝑁𝐷𝑈𝑆+𝑏3𝐸𝑋𝑃+𝑏4𝐶𝐸𝑂.𝐼+𝑏5𝐼𝑀𝐼𝑇+𝑏6(𝐶𝐸𝑂.𝐼∗𝐼𝑀𝐼𝑇)+𝜀

1 + 𝑒𝑏0+𝑏1𝐺𝐸𝑁+𝑏2𝐼𝑁𝐷𝑈𝑆+𝑏3𝐸𝑋𝑃+𝑏4𝐶𝐸𝑂.𝐼+𝑏5𝐼𝑀𝐼𝑇+𝑏6(𝐶𝐸𝑂.𝐼∗𝐼𝑀𝐼𝑇)+𝜀

where p is the probability of a right-leaning country investment

𝑏₀ is the intercept at the y-axis when the predictor variables are zero,

𝑏1−𝑏5 are the regression coefficients,

GEN represents the variable Gender, INDUS shows the industry,

EXP represents prior host country experience, CEO.I is the CEO Ideology,

IMIT is the CEO Imitation, and

𝜀 the error

4. Results

4.1. Assumptions and Transformations

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conducted by transforming all continuous independent variables into their natural logarithms and regress the interaction terms on the dependent variable (Wilson and Lorenz, 2015). According to the results of the procedure, linearity is given. Next, the independent variables cannot show any multicollinearity. To address this issue, the correlation coefficients will be examined through the Variance Inflation Factor (VIF), which is recommended to be very close to 1 (no multicollinearity) and should not exceed 10 (serious multicollinearity). For logistic regressions, it is recommended that the VIF not exceed the value of 2.5 in logistic regression (Allison, 2012). In this study, all continuous variables show a VIF between 1.012 and 1.032, confirming that there is no multicollinearity. Lastly, every regression analysis requires to pay attention to possible outliers who may not fit the model. Running a Casewise Diagnosis, there were two cases with studentized residuals with the values of -2.4 and -3.2 standard deviations respectively, which were excluded since they drastically influenced the results of the study.

4.2. Descriptive Statistics and variable correlations

The descriptive statistics are shown below in table 1. After collecting the donation data and assigning each CEO an individual index, the distribution of the sample showed to be u-shaped, meaning that there was high population towards the ends of the spectrum and a void in the middle. This could be related to the two-party system of the United States. Over time, the party affiliation of individuals stabilizes as they increasingly identify themselves with one of the camps (Kuhn, 2009). Since there are essentially only two positions facing each other, most people may either identify themselves as one or the other, or, as a Democrat or a Republican, respectively. The results of the donation data collection are an obstacle to the analysis as the distribution of the indices is far from being normally distributed. Therefore, I have decided to exclude the CEOs who were assigned an index between -0.2 and 0.2 (approx. 20 CEOs with 50 deals) to align the variable to a normal distribution. To close the gap, 0.2 was added to negative indices and subtracted from positive indices. Finally, each index was increased by 1 to ensure that there are no negative values as the regression analysis includes transforming the independent variables into the natural logs.

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Additionally, the correlation analysis shows that all the correlations between variables is considerably weak and do not exceed the value 0.7, indicating that the regression analysis can be conducted without hindrance (Pallant, 2013).

Descriptive Statistics Inter-Item Correlation Matrix

N=424 Min Max Mean Std.

Deviation 1 2 3 4 5 6 7 1 Governance Leaning 0 1 ,729 ,45 1,00 2 Gender 0 1 ,981 ,14 -,08 1,00 3 Industry 0 1 ,521 ,50 -,11 ,08 1,00 4 Firm Size 375 300000 57787 71015 ,07 ,01 -,20 1,00 5 Prior Experience 0 666 17,336 69,58 ,07 ,01 -,11 -,05 1,00 6 CEO Ideology ,20 1,80 1,12 ,67 -,03 ,11 ,15 ,13 -,08 1,00 7 Imitation ,0066 ,1521 ,0352 ,03 ,08 ,00 ,01 -,02 -,04 -,11 1,00

Table 1: Descriptive Statistics

4.3. Binominal logistic regression results and hypothesis testing

The binominal logistic regression analysis was executed to examine the effects of CEO political leaning on the likelihood that the CEO invests in countries that are either liberal or conservative as moderated by imitation and controlled for gender, firm size and prior host country experience. The analysis was conducted with the help of the statistic software SPSS 23 provided by IBM. To assess the analysis comprehensively, a multi-level regression was executed where the variables we added to the model at differing stages: while the first model only includes the control variables, the second model includes the main independent variable to test the hypotheses and to the third model includes the moderating variable to test hypothesis 1 as well as hypothesis 2 (Wilson and Lorenz, 2015). After running all three models, the outliers were identified and excluded of the regression analysis, as there was a strong impact in the results. The results are summarized in table 2.

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variance can be explained by the model, although 72.9% of the cases are being predicted correctly into their categories. None of the control variable seem to significantly predict the dependent variable.

To test hypothesis 1, the second model takes the main variable, the CEO Ideology Index, is into the equation. The goodness fit of the model deceases as the Omnibus Test indicates a lower significance than before, but can still be accepted (𝑝 < 0.05). The ideology of the CEO has no impact on the explanatory power of the independent variables (𝑝 > 0.1), indicating that the hypothesis 1 cannot be supported.

Adding the moderator variable to the third model, the goodness of fit indicates the highest significance among the three models (𝑝 < .01), which is also supported by the insignificance of the HL test and thus fits best with the data. The variance of the dependent variable can also be explained on a broader range, although the difference to prior models is only small (Nagelkerke R2: 7,4%) while maintaining the same level of category prediction (72.9%). Adding the moderator variable has changed the main independent variable to be slightly significant in this model (𝑝 < 0.1). Further, the interaction term that indicates the moderating effect on the ideology of the CEO, is shown to be significant as well (𝑝 < .05). Before drawing final conclusions on the hypotheses, the B coefficients for the main independent variable as well as the interaction term need to be standardized. For the standardization, the following formula1 _{will be used:}

Std(𝛽) = 1 1 + 𝑒− ln( μ𝑝 1−μ𝑝)+0.5∗𝛽𝑖∗σ𝑖 − 1 1 + 𝑒ln( μ𝑝 1−μ𝑝)+0.5∗𝛽𝑖∗σ𝑖

Std (β): standardized Beta weight

𝜇_𝑝: mean of the predicted probabilities of predicted probability

𝛽𝑖: unstandardized Beta weight of variable i 𝜎_𝑖: standard deviation of variable i

The standardized beta weight now equals -0.0658, which leads to an odd ratio factor of 𝑒−0.0658 = 0.9363. This concludes that for every standardized unit increase of the CEO Ideology, the odd ratio of the deal being in a country with a right-leaning government decreases by the factor of 0.93. An odds ratio below 1 indicates that the main effect is negative, as with a

24

unit increase of the predictor (a CEO being more conservative), the odds for the event of investing in a right-leaning government occurring decreases. Thus, hypothesis 1 is rejected.

Standardizing the coefficient of the interaction term results in an odd ratio factor of 1.121 (𝑝 < .05). As the odds ratio is positive and above 1, the effect of the main predictor (CEO political orientation) on the dependent variable (government leaning) gets larger with an increase of the interaction term (mimetic pressure), indicating an amplifying effect on the main relation. Therefore, hypothesis 2 is rejected.

Predictor Variables Model 1 Odd Ratios Model 2 Odd Ratios Model 3 Odd Ratios Gender 0.000 0.000 0.000 Industry 0.692 0.701 0.702 Firm Size 1.000 1.000 1.000 Experience 1.005 1.005 1.005 CEO Ideology 0.975 0.936*° Imitation 0.003 Ideology*Interaction 1.121**° Chi-square 13.945** 14.057** 22.1117** Nagelkerle R² (%) 4.7% 4.7% 7.4% HL test 0.515 0.585 0.716 Classification (%) 72.9% 72.9% 72.9%

* significant at 0.1; ** significant at 0.05; *** significant at 0.01 ° standardized Odds Ratio

Table 2: Binominal logistic regression analysis

4.4. Robustness Check

To assure the validity of the models used in this thesis, I have conducted several robustness checks. They are needed as studies on the fields of social or business sciences are subject to uncertainty (Young and Holsteen, 2017). If the robustness tests can show that the coefficients of the variables differ by a small amount, the models of the conducted study are seen as robust. The results will be added to the Appendix C.

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5. Discussion

5.1. Discussion of the analysis results

This study aimed to answer the question whether the decision-making outcomes of corporate executives were influenced by their political conviction and the political leaning of the host country when engaging in cross border mergers and acquisitions. It was hypothesized that CEOs who have a political stance prefer countries whose administration represents values and beliefs that are similar to those of the CEO, such that CEOs who can be identified as liberal show a tendency for left-leaning governments and those who can be identified as conservative seek countries with a right-leaning government. The study drew from politically motivated financial contributions of American CEOs towards the Democratic and Republican Party as well as the classification of the World Bank Development Research Group of current and previous administrations regarding their party orientation and policies. Additionally, the study raised the question whether cross-border investment decisions of others in the form of foreign investments affected the focal CEOs tendencies towards a specific government-leaning.

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Another explanation for the puzzling results of the second model can be related to the low value-sensitivity of foreign direct investments. Determinants like the local infrastructure, national labor costs and expected profits are purely economic considerations when facing M&A engagements (Danciu and Strat, 2014). By contrast, the focal study was mainly focusing on decisions stemming from a CEOs personal orientation. While values are strong predictors for approaching social and environmental issues and responsibilities (Chin et al., 2013), chances are that foreign firm acquisition exceeds the boundaries in which the ideologies of the CEO solely determine outcomes as there is more on the line.

Regarding the second model, the results require more attention as the interpretation is less intuitive than interpreting the results of the previous model. First, they indicate that the predictor is significant only under the condition that the interaction term is included. In other words, the political ideology shows to affect the FDI choice with respect to the governmental leaning when international FDI flows are included. With respect to the first model as well, the results indicate that there is a more complex and intricate framework needed to identify the relevant determinants for internationalization decisions that exceed personal traits and economic factors. Personal values are a strong predictor in some cases, but here, more factors need to be included to provide a bigger and clearer picture.

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5.2. Limitations and Recommendations

As with every study, the focal research needs to acknowledge some limitations. First, the way the political orientation of the CEOs was measured is only a proxy for their underlying values and beliefs. Those values may or may not always be aligned to the value set represented by one of the two parties in the US. Although donation data has been used by a magnitude of studies focused on the relationship between the CEO and firm outcomes, it is not guaranteed that the assigned position on the political spectrum is perfectly precise. The values of an individual who is assigned to be on the liberal side of the spectrum does not necessarily need to be an exclusive subset of liberal values, as he or she might also promote conservative values - the total set of beliefs can be hardly categorized by only one ideology (Francia, 2005). Further, the CEOs may pursue different goals with their contributions than others. Some companies believe that those donations serve as an investment towards political recognition and influence, although there is, according to a study by Fowler, Garro and Spenkuch (2017) no economic benefit returning from those contributions. Following that idea, individual contribution may also be driven by reasons other than those tied to a subset of political values, such as gaining personal profit and power. As the contribution data is used as a proxy for a psychological attitude, the foundation on which such an index is calculated needs to be more precise. Similar to other studies, including surveys that are focused on the identification of political ideologies would increase the depth of the study, while widening the sample size by including companies which are not listed in the S&P 500 index increases the breadth of the research (as in: Chin et al., 2013).

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While those developments are mostly considered from a performance maximization perspective, cultural attributes may be a driver for CEOs commitment when making internationalization decisions.

Lastly, this study has only included a small number of potential determinants for internationalization decisions. As those decision-making processes are inherently complex, a broad and comprehensive study may lead to better and more sophisticated predictions. For example, the total investment volume of the deal be added as a variable to the model. Because there was only little information about the deal values publicly available, the scope of the investments remains unknown. Future research should address this issue by distinguishing between small deals and large M&A decisions that exceed the one percent mark of the total market value of the buying company (Moeller et al., 2005). While small deals might not draw much the attention of the CEO, larger transactions usually require full engagement by the top management and are thus more likely to be affected by personal factors.

6. Conclusion

Based on a sample of 424 deals conducted by 147 CEOs, the goal of this study was to contribute to the existing literature on the upper echelon by examining the relationship between the political orientation of the focal CEOs and their choice of destination for foreign direct investments. Specifically, the focal question of this study was: do CEOs have a tendency to

engage in merger and acquisition deals in countries with a government that has a value-congruent political leaning? The results did not provide support for the thesis as expected, but

29

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Appendices

A. Description of Variables

Variable Description Measure Source

Governance Leaning

Political Leaning of the host country government, divided between left and right

Based on coding by the Database of Political Institutions 2017 Codebook

DPI 2017 (World Bank)

Gender (control)

Gender of the CEO who has conducted the deal

"0" for female; "1" for male Orbis (BvD)

Industry (control)

Whether the target firm is in the same industry with the acquirer

"0" for different industry; "1" for same industry

Zephyr (BvD)

Firm Size (control)

Size of the acquiring company

number of employees Orbis; Zephyr (BvD)

Prior Experience (control)

Prior internationalization experience with the country of the target firm

number of subsidiaries in the country of the target firm

Zephyr(BvD)

CEO Ideology

Political ideology of the CEO Difference between contributions towards Republican Party and Democratic Party; Difference divided by the total amount of political contributions

Name via Orbis (BvD), Contributions via Open Sectrets (FEC)

Imitation Prior internationalization decisions of other companies

USD-value of inflowing FDI to focal country in previous year divided by total FDI to focal country in focal year