Master Thesis
Does TMT diversity influence the relationship between
cultural distance and cross-border M&A
performance?
Submitted byLynn Chioma Ekeya (S3775666) l.c.j.ekeya@student.rug.nl
Master International Business & Management
Supervision: University: Submission Date:
I
Abstract
The trend of international expansion through mergers and acquisition (M&A) is well-established in the literature. Cultural distance results to be one of the key determinants of M&A success or failure. Prior findings regarding the relationship of cultural distance and M&A performance yield inconclusive results. Based on the upper echelons theory, the study introduces top management team (TMT) diversity as a moderator of the relationship between cultural distance and M&A performance. Particularly, in dynamic and challenging environments diversity in TMTs is considered to have a meaningful impact on the performance of M&As. Therefore, the effect of gender diversity and international experience of TMTs will be examined in the context of cultural distance and M&As. The sample for the analysis consists of 235 cross-border M&A deals of S&P 500 listed US acquiring companies. The results indicate an insignificant effect of cultural distance on M&A performance. Gender diversity results to be insignificant in the context of cultural distance and M&A performance. Finally, the moderating effect of international experience is negatively influencing the relationship between cultural distance and M&A performance. The study contributes by complementing prior inconsistent findings regarding cultural distance and M&A performance. Furthermore, the study demonstrates the interrelatedness of the concepts of cultural distance, mergers and acquisitions, and TMT diversity. Particularly, the finding that international experience in the TMT is negatively influencing the relationship of cultural distance and M&A performance indicates support for the upper echelon theory and provides practical implications for TMT constellations, employee selection and improvements for future work assignments abroad.
Keywords: Cultural Distance, M&A Performance, Top Management Team, Gender Diversity,
II
Acknowledgments
III
Table of Content
Abstract ... I Acknowledgments... II List of Figures ... IV List of Tables ... IV List of Abbreviations ... IV 1 Introduction ... 1 2 Literature Review... 3 2.1 Cultural Distance ... 32.2 Mergers and Acquisitions... 4
2.3 Top Management Team Diversity... 6
3 Hypotheses ... 7
3.1 Cultural Distance and M&A Performance ... 7
3.2 TMT Diversity, Cultural Distance and M&A Performance ... 8
3.2.1 The Moderating Effect of TMT's Gender Diversity ... 8
3.2.2 The Moderating effect of TMT's International Experience ... 9
3.3 Conceptual model ... 10
4 Methodology ... 11
4.1 Research Sample ... 11
4.2 Variables and Measurement ... 12
4.2.1 Dependent Variable ... 12 4.2.2 Independent Variable ... 13 4.2.3 Moderator Variables ... 13 4.2.4 Control Variables ... 14 5 Analysis... 15 5.1 Regression Analysis ... 15 5.2 Moderation Analysis ... 16
5.3 Testing for Assumptions ... 17
6 Results ... 19
6.1 Descriptive Statistics ... 19
6.2 Correlations ... 20
IV
6.3.1 Regression Analysis of the Main Effect ... 21
6.3.2 Regression Analysis of the Moderating Effects... 23
6.3.3 Robustness Test ... 25
7 Discussion and Conclusion ... 27
7.1 Theoretical Implications ... 29
7.2 Practical Implications ... 29
7.3 Limitations and Future Research... 30
8 References ... 32
9 Appendices ... i
9.1 Appendix A: Cultural Distances from US to Target Country ... i
9.2 Appendix B: Sector and Year Frequencies ... ii
9.3 Appendix C: Test of Assumption of Linearity ... ii
9.4 Appendix D: Test of Assumption of Heteroscedasticity ... iii
9.5 Appendix E: Test of Assumption of Normal Distribution ... iv
9.6 Appendix F: Boxplot ... iv
9.7 Appendix G: Correlation Matrix ... v
9.8 Appendix F: Robustness Tests ... vi
List of Figures
Figure 1: Conceptual Model ... 10List of Tables
Table 1: Descriptive Statistics ... 20Table 2: Model Summary of the Regression Analysis of the Main Effect... 22
Table 3: Model Summary of the Regression Analysis of the Moderating Effects ... 24
Table 4: Correlation Matrix ... v
List of Abbreviations
1
1 Introduction
Globalization, technology, and economic development contributed to the interconnectedness of markets, abrupt market saturation and changing customer demands (Caiazza & Volpe, 2015; Sherman, 2011). Therefore, companies demonstrate a strong interest in international markets to leverage new customer groups, get access to new resources and increase market share as well as revenue. Mergers and acquisitions (M&A) are conventional methods to extend international presence (Caiazza & Volpe, 2015). The identification of new business opportunities, economies of scale and scope and innovative development can be beneficial outcomes of an M&A deal (Boateng, Du, Bi, & Lodorfos, 2019; Graebner, Heimeriks, Huy, & Vaara, 2017). Nonetheless, the likelihood of failure of M&A projects is high (Bauer & Matzler, 2014). Particularly, M&A deals to cultural distant countries come with challenges (Huang & Kisgen, 2013). The performance of an M&A projects is contingent upon the cultural fit between acquirer and target company (Boateng et al., 2019; Shenkar, 2001). The overarching notion is that despite some positive aspects such as leveraging new resources and opportunities which eventually lead over time to an increase in M&A performance, that cultural distance impairs the likelihood of M&As success. Differences in culture are likely to induce conflict, distrust, and unwillingness to cooperate, which influences wealth appropriation, integration efforts and ultimately M&A performance (Ahammad & Glaister, 2011; Boateng et al., 2019; Datta & Puia, 1995; Rottig & Reus, 2018; Thanos & Papadakis, 2012). Findings of prior literature regarding the impact of cultural differences in the contexts of M&As are mixed. Some studies proof a beneficial influence of cultural distance on M&A deals (e.g. Ahammad & Glaister, 2011; Chakrabarti et al., 2009; Morosini et al., 1998), other studies present negative empirical findings (e.g. Boateng et al., 2019; Datta & Puia, 1995; Huang & Kisgen, 2013; Rottig & Reus, 2017; Uhlenbruck, 2004) and a few studies could not find significant results to support the relationship at all (Stahl & Voigt, 2004). The inconclusive findings indicate that the relationship between both constructs is more complicated than expected.
2 attributes. On the one hand, diversity in teams has advantages such as access to information, new opportunities, and flexibility (Bunderson & Van der Vegt, 2018). On the other hand, a diverse TMT is likely to have difficulties in establishing personal relationships and often suffers from discrimination of outgroups (Bunderson & Van der Vegt, 2018; van Knippenberg & Mell, 2016). Furthermore, the effect of diversity on organizational decisions and performance depends on the type of attribute under examination. For instance, conflicts, time-intensive decision-making and less initiative for new opportunities are associated with gender diversity (Chen, Crossland, & Huang, 2016; Huang & Kisgen, 2013; Parola et al., 2015). In contrast, the international experience of TMT managers; thus, a diverse repertoire in international work assignments of individuals are considered to have positive effects on performance. Managers with work experience abroad develop global-mindsets, knowledge, and networks, which helps the organization to undertake transactions in foreign countries. TMT diversity is particularly important in challenging and fast-changing environments (Bunderson & Van der Vegt, 2018). M&As entail complex processes which are complicated by adding cultural distance to it. This study investigates the impact of TMT diversity on M&A performance in culturally different countries. The objective of this paper is to resolve the research question:
“Does TMT diversity influence the relationship between cultural distance and
cross-border M&A performance?”.
Answering the research question contributes to theory and provides practical implications. The study aims to demonstrate the interrelatedness of cultural distance, M&As, and TMTs. Prior literature related the constructs pairwise but barely put them into one framework. Further, the paper intends to indicate the effect of TMT diversity on M&As to culturally distant countries and thereby supporting the notion of the upper echelon theory that TMT characteristics have a significant influence on organizational outcomes. Finally, the empirical results will contribute to prior inconsistent findings. The findings might support organizations in the determination of TMT constellations, employee selection and in the evaluation of international work assignments.
3 hypotheses. Both procedures will be outlined in Chapter 5. Moreover, the results will be illustrated and discussed at the end of the paper. The study concludes with theoretical and practical implications, limitations and future research.
2 Literature Review
The chapter examines cultural distance, M&As, and TMT diversity in light of relevant and recent literature. The literature review is the base on which the hypotheses of this study are developed.
2.1 Cultural Distance
Cultural distance is "the difference between the cultures of the home and host countries" (Beugelsdijk, Kostova, van Essen, Kunst, & Spadafora, 2017, p.93), whereby culture is defined by Hofstede (2011, p. 3) as the "collective programming of the mind that distinguishes the members of one group or category of people from others". In a world, where companies strive for international presence, international expansion is a conventional process for the majority of organizations. Culture results to be a critical determinant of organizational performance in international environments (Boateng et al., 2019; Shenkar, 2001). Especially in the context of M&As, bridging cultural distances is challenging (Huang & Brass, 2016). Accordingly, Beugelsdijk, Ambos, and Nell (2018) found out that the likelihood for an expansion to a culturally distant country is low. An M&A deal in a foreign country implies the convergence of contrasting norms, beliefs, and practices, which eventually leads to friction, distrust, language barriers, regulatory differences or stereotyping (Shenkar, 2001; Stahl & Voigt, 2004). In their paper, Huang and Brass (2016) highlight the overarching assumption that acquirers and target countries which are culturally distinct from each other perform low.
4 country with regard to culture, present valuable learning opportunities (Ahammad & Glaister, 2011).
On the other hand, there are studies presenting findings in line with the overarching hypothesis, thus, predicting a negative impact of culture on M&A performance. According to Uhlenbruck (2004), cultural distance affects M&A performance negatively in two ways. First, it deteriorates the possibility to create value in the local market. Second, it undermines the development of new capabilities resulting from the expansion in a foreign country. Rottig and Reus' (2017) empirical results reveal that expanding to cultural distant countries leads to friction. Distance damages the relationship between acquirer and target and enables opportunistic behavior. Furthermore, cultural distance can be a barrier to integration (Ahammad & Glaister, 2011). It impairs communication between acquirer and target and therefore is more likely to negatively impact M&A’s success. Datta and Puia (1995) indicate that cross-border acquisitions are not valuable for the shareholders of the acquiring firm. They linked cultural distance to diminishing wealth effects. Moreover, some studies predict an adverse effect of dissimilar cultures on the performance of M&As in long- and short-term (Boateng et al., 2019; Huang & Brass, 2016).
However, in their review on cultural differences and acquisition performance, Stahl and Voigt (2004) refer to studies which proofed no relationship between cultural distance and M&A performance, suggesting a more complex relationship between both constructs. The empirical results in the literature are mainly inconclusive and contradicting (Beugelsdijk et al., 2018; Boateng et al., 2019; Huang & Brass, 2016; Rottig & Reus, 2017; Stahl & Voigt, 2004; Weber, Tarba, & Reichel, 2009).
2.2 Mergers and Acquisitions
5 (Caiazza & Volpe, 2015). In his book, Sherman (2011) indicates the importance of differing between mergers and acquisitions. A merger is defined as one entity created by the consolidation of two companies (Sherman, 2011). Whereas an acquisition involves a buying company which purchases a target company (Sherman, 2011). Hence, the first is an equal joining of two entities and the latter one resourceful party that owns the other remaining party. Nonetheless, both terms are associated with the same outcome that two companies work together to achieve monetary and strategic benefits (Sherman, 2011)1.
As mentioned earlier, different trends in the industry can be drivers for the engagement in an M&A. For instance, consumer expectations can change over time or the interest in certain product categories declines (Sherman, 2011). Furthermore, technological improvements or competition can motivate a company to grow internationally (Sherman, 2011). Companies strive for global presence to sustain a competitive advantage (Caiazza & Volpe, 2015). Finally, cost pressures can also urge a company to decide for an M&A (Sherman, 2011).
M&As provide companies with several promising advantages. Entering a foreign country gives access to new opportunities while acquiring new customer groups (Boateng et al., 2019; Graebner et al., 2017). Second, by forming an entity, companies can synergies their forces and reduce costs through economies of scale and scope (Boateng et al., 2019; Graebner et al., 2017; Sherman, 2011). Further, M&As enable rapid development of innovative technologies (Graebner et al., 2017). All aspects above support the company in sustaining a competitive position within the industry and increase the probability of organizational success (Boateng et al., 2019).
Despite the advantages, the success rates are rather low, with 40-60% (Bauer & Matzler, 2014). The success rates are even lower for international M&As (Rottig & Reus, 2018). M&A deals are often associated with negative consequences because they involve more difficulties and uncertainties than domestic M&As (Graebner et al., 2017; Rottig & Reus, 2018). Particularly, the cultural fit can influence the choice of organizational processes, strategies, and decisions (Bauer & Matzler, 2014; Boateng et al., 2019). An M&A between countries which are cultural dissimilar can result in lower engagement and lower willingness to cooperate (Rottig & Reus, 2018; Thanos & Papadakis, 2012). Moreover, M&As to cultural distinct countries can cause the deterioration of the health state of the employees (Rottig & Reus, 2018). Job satisfaction declines and employees eventually leave the company. The
6 reasons above contribute negatively to the creation of synergies and therefore impair organizational performance (Boateng et al., 2019; Rottig & Reus, 2018).
To conclude, M&As are promising sources for new opportunities and financial benefits but at the same time set companies for several challenges which eventually end in failure or a decline in performance. Literature indicates inconsistent and inconclusive findings regarding the drivers of M&A success (Boateng et al., 2019; Graebner et al., 2017; Rottig & Reus, 2018; Weber et al., 2009). Therefore, a more comprehensive perspective has to be adopted to complement the knowledge about M&A performance (Bauer & Matzler, 2014).
2.3 Top Management Team Diversity
The relevance of the constellation of the top management team on decision-making processes, organizational behavior and outcomes is undeniable (Bunderson & Van der Vegt, 2018; Nielsen, 2010; Reuber & Fischer, 1997). The importance of the collective impact on organizational outcomes is based on the upper echelons theory. The theory was introduced by Hambrick and Mason (1984), stating that strategic choices depend on the reflections of their managers. According to the theory, managers make decisions based on individual judgments and perceptions formed out of their experience, thoughts, and norms (Abatecola & Cristofaro, 2018). The author's framework is based on the presumption of sense-making on the executive level and is taking individual profiles and their combined impact in the organizational context into account (Abatecola & Cristofaro, 2018). A manager’s profile consists out of different socio-demographic characteristics (e.g. gender and international experience) which influence cognitive processes (Abatecola & Cristofaro, 2018). The individual development of each economic characteristic can differ among managers, which result in a diversity of socio-economic characteristics in top management teams. Diversity is defined as “horizontal differences between members” (Bunderson & Van der Vegt, 2018, p. 61).
7 Besides the positive effects, some studies present negative empirical findings. Van Knippenberg and Mell (2016) argue that despite the positive effects of TMT diversity, diversity is considered to deteriorate personal relationship within the team, which affects firm performance. Other authors add that diverse teams tend to identify with multiple social groups and therefore impede the exchange of information due to the exclusion of certain groups and favoritism of others (Bunderson & Van der Vegt, 2018).
In conclusion, empirical findings demonstrate inconsistent patterns (Bunderson & Van der Vegt, 2018; Nielsen & Nielsen, 2013; Nielsen, 2010). Some studies make a positive association, whereas other studies indicate negative or non-significant effects. Besides emergence, size and direction of an effect also depend on the diversity attribute under examination (Nielsen & Nielsen, 2013). Nevertheless, it is ascertained that TMT diversity in dynamic context can elevate organizational performance but can lead to constraints in information exchange and inefficiencies in decision-making.
3 Hypotheses
In the following chapter, links between the constructs above will be established. Based on the literature review, three hypotheses will be derived and further discussed.
3.1 Cultural Distance and M&A Performance
As already discussed in Chapter 2, cultural distance and M&A are interrelated. The literature describes M&A deals into countries with relatively different cultural values compared to the domestic market as particularly challenging (Huang & Brass, 2016). Culture directly influences organizational behavior and therefore contributes to the success or failure of M&A operations (Boateng et al., 2019; Stahl & Voigt, 2004).
8 performance (Ahammad & Glaister, 2011; Boateng et al., 2019; Datta & Puia, 1995; Huang & Brass, 2016; Rottig & Reus, 2018). This study aims to follow suggestions of prior literature in assuming a negative relationship between both constructs.
H1: Cultural distance between acquirer and target impacts the M&A performance negatively.
3.2 TMT Diversity, Cultural Distance and M&A Performance
Chapter 2.3 already emphasizes the relevance of the top management team in the context of organizational behavior and performance. Prior studies demonstrate a link between acquisition success (Nadolska & Barkema, 2014) and international diversification (Li & Lo, 2017). Nonetheless, literature regarding the effect of diversity of the TMT on firm performance indicates inconclusive findings. The following two subchapters elaborate on the idea of the influence of gender diversity and international experience in top management teams.
3.2.1 The Moderating Effect of TMT Gender Diversity
9 two groups has a negative influence on group dynamics and impedes performance consequently (Nielsen & Börjeson, 2019). Third, decision-making takes longer in gender diverse teams (Parola et al., 2015). Female managers rather tend to share power equally instead of centralizing it. However, decision-making requires the centralization of power. For this reason and also because women tend to make more comprehensive decisions, the decision time increases (Chen et al., 2016; Parola et al., 2015), which eventually hinders organizational performance. Finally, Parola, Ellis, and Golden (2015) argue that due to higher adversity of risk, women obtain lower return on revenue than their counterparts. Based on the negative findings of gender diversity on firm performance, it is assumed that TMT gender diversity is influencing the relationship between cultural distance and M&A performance negatively.
H2: TMT gender diversity is negatively moderating the relationship between cultural distance
and M&A performance.
3.2.2 The Moderating effect of TMT International Experience
10 failure rate and are associated with uncertainties, especially when cultural distance complicates the event. Experience abroad of TMT members can counteract ambiguities and diminish risk due to network contacts and global mindsets (Hutzschenreuter & Horstkotte, 2013; Nielsen & Nielsen, 2011; Tihanyi et al., 2000). Finally, in several studies, international experience is associated with international success and positive firm performance (Abatecola & Cristofaro, 2018; Azam et al., 2014; Hutzschenreuter et al., 2016; Reuber & Fischer, 1997). Hutzschenreuter and Horstkotte (2013) argue that TMT international experience is likely to elevate the adverse impact that cultural differences between acquirer and target have on firm performance. For this reason, a positive effect of international experience in TMTs is expected on the relationship between cultural distance and M&A performance.
H3: TMT international experience is positively moderating the relationship between cultural
distance and M&A performance.
3.3 Conceptual model
Figure 1 presents all constructs and their assumed relationship in a conceptual model. Hypothesis 1 indicates a negative relationship between cultural distance and M&A performance. Following, this relationship is negatively moderated by TMT gender diversity. Finally, for TMT international experience, a positive impact on the relationship between cultural distance and M&A performance is expected.
Figure 1: Conceptual Model
H3 (+)
H2 (-) H1 (-)
Cultural Distance M&A Performance
TMT's International Experience
11
4 Methodology
The chapter describes methodological strategies which were applied to test the hypotheses. First, the research sample will be described, followed by an explanation of the measurement of dependent, independent and moderation variables. Relevant control variables and their measurement are discussed at the end of this chapter.
4.1 Research Sample
Relevant data for the sample in this study was derived from Zephyr, WRDS, Compustat, BoardeX, and information from the Hofstede website. The database Zephyr contains relevant information related to M&A deals around the world. Zephyr was accessed to select M&A deals for this paper. In order to create a descriptive sample and to make data collection feasible, a well-defined search strategy was applied. First, only acquirers from the S&P 500 index were considered for the sample. The S&P 500 index contains the 500 largest publicly-listed companies. Nonetheless, some companies were filed as Irish or Austrian and therefore, were excluded to keep the sample consistent. Second, the deal had to be announced and completed between the years 2012 and 2017. In line with the topic of this master thesis, the search strategy is based on cross-country M&As. In-country deals were excluded from the sample because the observation of the effect of cultural distance on M&A performance would be ineffective. Finally, the selection of deals focused on acquirers from the manufacturing industry. Particularly, in the manufacturing industry, the frequency of M&A deals is relatively high (Kogut & Singh, 1988). Acquirers were selected by US SIC codes from 20 until 39. In the end, the sample contained 405 M&A deals.
12 from the official website of Geert Hofstede. Deals with incomplete information were excluded. In the end, the sample contained 238 M&A deals of 93 US companies.
4.2 Variables and Measurement
In the following subchapter, the measurement of M&A performance, cultural distance, TMT gender diversity, international experience of TMTs and control variables will be explained.
4.2.1 Dependent Variable
In literature, M&A performance is assessed by various measurements. The most frequently used in literature are market-based measurements (Beugelsdijk et al., 2018; Huang & Brass, 2016). Tobin’s q which is considered a stock market-based measure as well is described as a “dynamic, forward-looking measure of firm-level economic performance” (Kor & Mahoney, 2005, p. 492). The performance indicator is defined as the shareholder’s expectations about profitability and future development of a firm (Wernerfelt & Montgomery, 1988). Tobin’s q is considered more advantageous compared to other measures because it accounts for differences in accounting methods across countries, fluctuations, and volatility (Huang & Brass, 2016; Wernerfelt & Montgomery, 1988). In research, different formulas to calculate Tobin’s q are applied. This study aligns with a paper by Belderbos, Grabowska, Leten, Kelchtermans, & Ugur (2017), who calculated M&A performance as the ratio of market value and book value of the company’s total assets whereby market value referred to “the sum of market capitalization (share price times the number of outstanding shares at the end of the year)” (Belderbos, Grabowska, Leten, Kelchtermans, & Ugur, 2017, p. 322). M&A performance was measured two years after the completion of the deal. In their paper, Morosini et al. (1998) recommended assessing acquisition performance two years after the deal because the initial two years contribute critically to the performance. Furthermore, they argued that the likelihood that the acquisition process ended after two years is high. In Compustat, the below-presented variables were collected and put into the following formula to calculate Tobin’s q:
13 4.2.2 Independent Variable
There is ambiguity around the conceptualization of cultural distance. A lot of papers are differing in the measurement and the data on which cultural distance is based on (Hutzschenreuter et al., 2016). Despite some limitations, the composite index of Kogut and Singh remains the most widely used method to calculate cultural differences between countries (e.g. Azam, Boari, & Bertolotti, 2014; Morosini, Shane, & Singh, 1998). The Kogut and Singh index (KSindex) demonstrates these differences by subtracting the values on a set of cultural dimensions from one country of another country (Beugelsdijk et al., 2017). In most studies, the dimensions are based on the original four dimensions by Hofstede, but they can also be conceptualized through other data (Hutzschenreuter et al., 2016). This study uses the KSIndex based on the Power Distance, Collectivism vs. Individualism, Masculinity vs. Femininity, Uncertainty Avoidance dimensions of Hofstede. The KSIndex is a straightforward method to calculate distances, and the Hofstede data is easily accessible, and the data remains temporal stable (Beugelsdijk, Maseland, & Van Hoorn, 2015). Morosini et al., (1998) indicate that the data of Hofstede is valid and reliable. Furthermore, they argue that the use of secondary data is more appropriate because primary data collection can easily be biased due to the subjectivity of respondents. The formula of the KSIndex is the following (Kogut & Singh, 1988, p.422):
𝐾𝑆𝐼𝑛𝑑𝑒𝑥(𝑗) = ∑ {(𝐼𝑖𝑗 − 𝐼𝑖𝐻𝑂𝑀𝐸)2/𝑉𝑖}
𝑛
𝑖=1
∖ 𝑁
First, the cultural value on the ith dimension of the domestic market (𝐼𝑖𝐻𝑂𝑀𝐸) got subtracted of the score on the same cultural dimension of the host country (𝐼𝑖𝑗). In the following step, the
squared difference was divided through the variance of the ith dimension (𝑉𝑖). The results for the four dimensions got summed up and were divided through the number of dimensions (𝑁). The Kogut and Singh indices from the US to 39 target countries are presented in Appendix A.
4.2.3 Moderator Variables
Gender diversity was calculated with the Blau index. The Blau index is used in various studies
to calculate diversity for variables based on interval-level data, such as age, tenure, and gender (Bunderson & Van der Vegt, 2018).
1 − ∑ 𝑃𝑖2
14 𝑃𝑖 represents the proportion of TMT managers in n categories. The Blau Index can range from 0 to 0,5. A value of 0 means that there are no women in the top management team, whereas a value of 0,5 indicates an evenly distributed team of women and men.
For the moderating variable international experience, the employment history of each TMT member was examined. International experience was thereby considered as work experience beyond the US or at least in more than two different countries. Instead of following the conceptualization of work experience abroad of prior studies by simply capturing the variable as a binary indicator (e.g. Reuber & Fischer, 1997), this study relies on a more comprehensive approach by considering the number of countries an individual worked in (e.g. Koo Moon et al., 2012). The number of countries of each team member was determined, and the mean of each team calculated. Aggregating the values and forming a single measure is an accurate method to look at the distribution of variance in TMT members score of international experience (Bunderson & Van der Vegt, 2018).
4.2.4 Control Variables
To account for external influences that could manipulate this study, six additional control variables are introduced. In their book, Darlington and Hayes (2017) emphasized the need to control for variables that eventually manipulate the relationship between the dependent and independent variable.
First, the size of the acquirer is accounted for. The size of a company could impact the M&A performance significantly because a larger size might be related to higher, revenues and therefore higher financial means to engage in multiple business opportunities which can compensate negative performance (Huang & Brass, 2016; Morosini et al., 1998). For the size of the acquirer, the number of employees of the latest available year is taken into account as a proxy (Nielsen & Nielsen, 2013).
The age of a firm could also possibly influence the performance after the completion of the M&A. A more mature firm might be more established in the industry and additionally might have established a reputation and gained more experience throughout the years. To asses firm age, the difference from a company’s inauguration date to 2019 was calculated.
15 to lead to contradicting viewpoints, which could complicate joint decision-making, thus, impair the likelihood of immediate positive performance. For the size of the TMT, the number of managers present at the announcement and the completion of the M&A was counted.
In their study, Nielsen and Nielsen (2013) tested TMT tenure in their analysis and found a moderating effect of TMT tenure on firm performance. To exclude this effect of the analysis of this study, TMT tenure is controlled for. The time of employment can bias team dynamics. Team members who joined the team recently might not participate as actively as team members with longer tenure. Tenure was defined as the mean of all top management team managers in their role to the time of the M&A.
Prior studies controlled for industry effects (Parola et al., 2015; Rivas, 2012). Dummy variables were coded for industry sectors to control for any industry-related effects. For instance, some industries are more likely to engage in M&As than others (Morosini et al., 1998). For each major sector (chemical, food, metal machinery, publishing, textile, and wood sector), a new variable was created and included in the analysis.
Finally, dummy variables for the years of the M&As were generated. Like prior studies, this study aims to control for influences of financial and economic situations throughout the years (Morosini et al., 1998; Parola et al., 2015). Extreme and unpredictable events can impact the performance of all M&As. Therefore, the year of completion served to define dummy variables for the years 2012 to 2016. In Appendix B, the distributions of the acquirers according to major sectors and the number of M&As according to years, are presented.
5 Analysis
Chapter 5 explains the choice of statistical analysis. Multiple linear regression and
moderation analysis are discussed in more detail. The last subchapter tests whether the data meet the assumptions of a regression analysis.
5.1 Regression Analysis
16 regression is a model which explains the relationship between the dependent variable y and an independent variable x (Landau & Everitt, 2004). The equation of a linear regression model is the following
𝑦𝑖 = 𝛽0+ 𝛽1𝑥𝑖+ 𝜀𝑖
where i reflects the number of observations for the dependent and independent variable, 𝛽0 is a constant and reflects the value for the dependent variable in the case that the independent variable is zero and 𝛽1 is a regression coefficient which illustrates the variance of the dependent
variable given an increase of the independent variable by a unit of one (Landau & Everitt, 2004). Finally, 𝜀𝑖 is the error in prediction. For the analysis of the main effect, Tobin’s q reflects the dependent variable which is assumed to be explained by the independent variable, namely cultural distance. Control variables are additional independent variables which are implemented to eliminate alternative influence. Instead of a linear regression model, a multiple linear regression model is appropriate because the model entails more than one variable that aims to explain M&A performance. A multiple linear regression explains the connection between dependent and several independent variables (Landau & Everitt, 2004). The multiple linear regression analysis for this study looks like the following
𝑦𝑖 = 𝛽0+ 𝛽1𝑥𝑖 + 𝐶1𝑥𝑖 + 𝐶2𝑥𝑖+. . .+ 𝐶15𝑥𝑖+ 𝜀𝑖
The base of the linear regression model remains the same but more regression coefficients (𝐶𝑖) got added to the model (firm size, firm age, TMT size, TMT tenure, industry and year).
5.2 Moderation Analysis
To test the second and third hypotheses, a modification to the model has to be made. Both hypotheses examine an interaction effect between cultural distance and TMT gender diversity at first and second, cultural distance and TMT international experience on the dependent variable. The model includes two linear terms, the product of both independent variables (Darlington & Hayes, 2016) and the control variables. The following formula is applied to illustrate the model
17 For the second hypothesis, M&A performance will be predicted by 𝑥1 (cultural distance) and 𝑥2 (TMT gender diversity). The same equation holds for the third hypothesis but 𝑥2 refers in
that case to TMT international experience. To prevent the issue of multicollinearity, the independent variables for the interaction term get mean-centered before multiplied with each other. Mean-centring is a common method before performing a moderation analysis (Field, 2013). The mean of the independent variables was created and subtracted from the original variable.
5.3 Testing for Assumptions
Before running the regression analysis, four assumptions have to be considered to ensure the validity and generalizability of the results (Darlington & Hayes, 2016; Field, 2013).
1. Linearity
2. Homoskedasticity 3. Normal distribution 4. Independent errors
Linearity refers to the assumption that the dependent variable has a linear relationship with the
independent variable (Field, 2013). If this assumption is not fulfilled and the relationship between 𝑦𝑖 and 𝑥𝑖 is explained through a curve, the model cannot be accurately interpreted (Darlington & Hayes, 2016). To test for linearity, the standardized residuals have to be plotted against the standardized predicted values (Field, 2013). In Appendix C, the normal probability plot is presented. The values are randomly distributed around zero, which indicates a linear relationship between the dependent and independent variable (Field, 2013).
18 . Nonetheless, a Breusch-Pagan test is conducted to test whether the assumption is met. The results are summarized in Appendix D. The assumption of heteroscedasticity was neglected.
The assumption of normal distribution means that residuals are distributed randomly with an average value around zero (Field, 2013). This assumption is mainly directed to studies with smaller samples. For studies with larger samples, the central limit theorem applies, meaning that a larger sample converges to a normal distribution in any case (Darlington & Hayes, 2017). The study entails 238 observations. Therefore, it is not required to test the assumption of normal distribution. Nevertheless, in Appendix E, a histogram illustrates the normal distribution of the dependent variable.
The fourth assumption deals with the independence of the errors. In the case of the correlation between residuals, the confidence intervals and significance cannot be properly assessed (Field, 2013). To test whether this assumption is met, the Durbin-Watson test was applied to examine correlations between errors. For the study, the rule of thumb is used, which considers values between 1 and three as valid (Field, 2013). The values of the Durbin-Watson test ranged from 2,016 to 2,060, hence assumption four can be rejected.
1. Outliers
2. Multicollinearity
Two additional assumptions of concerns are presented above. Outliers are defined as values that significantly differ from the rest of the observations and therefore manipulate the regression (Darlington & Hayes, 2016; Field, 2013). To correct this issue, a boxplot can be created. The boxplot is presented in Appendix F. SPSS considered values 1,5 interquartile ranges from the box as outliers and values three interquartile ranges as extreme outliers (Landau & Everitt, 2004). For the study, only values marked as extreme values are excluded. Therefore, three observations were excluded from the analysis.
19
6 Results
This chapter presents the empirical findings of the multiple linear regression analysis. First, descriptive information about the variables under examinations will be discussed. Next, the correlations between variables are demonstrated. Finally, the significance of the results of the regression analysis will be examined.
6.1 Descriptive Statistics
20
Table 1: Descriptive Statistics
Variable Mean
Standard
Deviation Min Max
Tobin’s Q 2,197 0,824 0,678 5,196 Culture Distance 1,149 1,161 0,015 5,392 % of Females 0,174 0,102 0 0,5 Int. Experience 1,243 0,711 0 5,571 Firm Size 47.417,383 40.612,686 3.000 240.000 Firm Age 56,5 38,31 2 137 TMT Size 9,92 2,127 5 16 Tenure 8,665 2,557 2,505 17,217 N=235 6.2 Correlations
In Appendix G, the bivariate Pearson correlations between the variables are presented in Table 4. The majority of the variables are correlating low with each other. The correlation between M&A performance and TMT size is negatively significant (-.239). The reason for that could be that bigger teams face more difficulties in decision making and the coordination which lower their performance relative to smaller teams. Cultural distance and firm age also correlate significantly (.243). A more mature company might have more experience and confidence in expanding to dissimilar cultural countries. The proportion of female TMT members correlates significantly positive (.218) with TMT size. Moreover, the correlation between international experience and firm size is significant (.201) because it is more likely that a bigger company has the means to send their employees on work assignments abroad compared to smaller companies. Finally, the correlation between international experience and tenure is negative. One assumption could be that the willingness to travel declines with increasing tenure.
6.3 Regression
21 6.3.1 Regression Analysis of the Main Effect
Table 2 presents the outcome of the analysis of the main effect (hypothesis 1). Model 1 illustrates the effect of the control variables on M&A performance. First, TMT size is significantly negative related to M&A performance (𝛽=-.102, p=.000). The beta coefficient (𝛽) explains the relationship between an independent and the dependent variable (Field, 2013). Beta is the factor which gets multiplied with the standard deviation of the independent variable given an increase of the dependent variable by one standard deviation. An interpretation of beta can be made under the condition that the remaining independent variables are constant (Field, 2013). Hence, an increase of one standard deviation in TMT size leads to a decrease in M&A performance of -0,0840 (-.102*0,823341206). Second, the chemical sector results to have significant explanatory power on M&A performance (𝛽=.405, p=.007). If the company completing a deal can be allocated to the chemical sector, the effect on M&A performance is positive. Third, the publishing sector has a significant negative influence on M&A performance (𝛽=-1,180, p=.014).
22
Table 2: Model Summary of the Regression Analysis of the Main Effect
Model 1 Model 2 Independent Variable Cultural Distance -.044 (.360) Control Variables Firm Size .001 (.670) .001 (.607) Firm Age -.001 (.369) -.001 (.442) TMT Size -.102 (.000)*** -.101 (.000)*** Tenure .027 (.249) .026 (.267) Y=2012 .033 (.830) .048 (.760) Y=2013 -.055 (.725) -.052 (.744) Y=2014 -.199 (.217) -185 (.255) Y=2016 -.043 (.800) -.040 (.814) Chemical Sector .405 (.007)*** .438 (.004)*** Food Sector .214 (.305) .226 (.281) Metal Sector .253 (.591) .265 (.574) Publishing Sector -1,180 (.014)** -1,184 (.014)** Textile Sector -.446 (.271) -.396 (.333) Wood Sector .437 (.227) .482 (.187) F-stat. 2,737 2,609 Prob > F .001*** .001*** R square .148 .152 Adjusted R square .094 .094 R square change .003 ***p≤0.01, **p≤0.05, *p≤0.1 N=235
Note: Machinery sector and Y=2015 were excluded from the analysis
23 6.3.2 Regression Analysis of the Moderating Effects
In Table 3, Model 3 to 5 summarize the results of the moderating effects of gender diversity and international experience on M&A performance. Model 3 again contains the control variables, hence shows the same results as model 1. The model is added to the table to emphasize and better visualize the effect of the moderators. As the model is already described beforehand, the results are not discussed at this point.
24
Table 3: Model Summary of the Regression Analysis of the Moderating Effects
Model 3 Model 4 Model 5
Independent Variable
Cultural Distance -.034 (.469) -.032 (.508)
International Experience .002 (.958)
Gender Diversity 1,406 (.010)***
Moderation Effect
Cultural Distance * International
Experience -.167 (.018)**
Cultural Distance * Gender
Diversity .091 (.858) Control Variables Firm Size .001 (.670) .000 (.827) .001 (.656) Firm Age -.001 (.369) -.002 (.317) -.001 (.500) TMT Size -.102 (.000)*** -.112 (.000)*** -.100 (.000)*** Tenure .027 (.249) .027 (.239) .022 (.332) Y=2012 .033 (.830) -.077 (.620) .051 (.743) Y=2013 -.055 (.725) -.038 (.809) -.069 (.660) Y=2014 -.199 (.217) -.192 (.234) -.208 (.197) Y=2016 -.043 (.800) -.047 (.778) -.048 (.777) Chemical Sector .405 (.007)*** .401 (.009)*** .410 (.009)*** Food Sector .214 (.305) .228 (.272) .176 (.401) Metal Sector .253 (.591) .224 (.630) .371 (.428) Publishing Sector -1,180 (.014)** -1,343 (.005)*** -1,296 (.008)*** Textile Sector -.446 (.271) -.509 (.211) -..469 (.253) Wood Sector .437 (.227) .615 (.469) .414 (.254) F-stat. 2,737 2,754 2,675 Prob > F .001*** .000*** .001*** R square .148 .177 .173 Adjusted R square .094 .113 .109 R square change .029 .022 ***p≤0.01, **p≤0.05, *p≤0.1 N=235
Note: Machinery sector and Y=2015 were excluded from the analysis
25 compared to model 3 (R square=.173). Looking at the adjusted R square of model 5 (adjusted R square=.109), the explanatory power of the independent variables in model 5 is better than in model 3.
6.3.3 Robustness Test
To ensure the reliability of the results in this study, additional robustness tests were performed. The tests aim to replicate the results of the regression analysis based on distinct measurements of the variables. Model 6 to 18 illustrate the results of the robustness tests and can be found in Appendix F.
International experience (standard deviation)
Alternatively, the dispersion of TMT international experience can be calculated by the standard deviation of the aggregated number of international experience of TMT members (Bunderson & Van der Vegt, 2018). The outcome of the test is similar to the results of the moderation analysis in Chapter 6.3.2. Model 6 and 7 resume the results of the robustness test. The control variables TMT size, the chemical and publishing sector reveal a similar pattern like before. The effect of TMT international experience is significant and moderates the main relationship negatively (𝛽=-.173, p=.018).
International experience as a dummy variable
For the TMT international experience, a more simplified measure was applied. The variable was assessed in the form of dummy indicators. A manager either had international experience or not (yes=1, no=0). Instead of using the team average, the Blau index was calculated to look at the diversity of international experience within the team. The equation was explained earlier in Chapter 4.2.3. Model 8 and 9 in Appendix F present the findings of the robustness test. The results are in line with the regression results of this study. Again, the moderation effect is marginally significant and negative (𝛽=-.545, p=.053).
Robustness test with Tobin’s q one year after the completion
26 diversity (𝛽=.268, p=.577). Finally, international experience as a moderator follows the pattern of the prior regression analysis. The moderator has an adverse effect on the relationship between cultural distance and the performance of M&As (𝛽=-.151, p=.023). Model 10 to 12 in Appendix F show the results of the robustness test.
Robustness test with cultural distance (6 dimensions)
The fourth robustness test is conducted with a modification of cultural distance. There are intense debates and disagreements about the right conceptualization of cultural distance. A lot of papers differ in their approaches to calculate the variable (e.g. Boateng et al., 2019). For this reason, a second approach is adopted to validate the findings of this study. Hofstede added a fifth and sixth dimension to his cultural framework. Shenkar (2001) advises adopting the fifth dimension of Hofstede, as this dimension is especially relevant in the case of Asian countries. Therefore, and for the sake of completeness, cultural distance is calculated by the KSndex based on all six dimensions. The formula is illustrated in Chapter 4.2.2. Again, the results are in line with the outcome of the regression analysis of this study. The main effect (𝛽=-.051, p=.294) and the moderating effect of gender diversity are not significant (𝛽=-.334, p=.540) while international experience moderates the relationship between cultural distance and M&A performance negatively (𝛽=-.148, p=.036). Model 13 to 15 in Appendix F resume the findings of the analyses.
Robustness test with cultural distance (Euclidean)
27
7 Discussion and Conclusion
Based on prior literature, links between M&A performance, cultural distance, and TMT can be identified. However, the constructs were discussed pairwise rather than putting them into a joint context. The study aims to highlight the interrelatedness of the constructs and similarly intends to contribute to upper echelons theory and drivers of M&A performance. The paper is structured with the objective to answer the question of whether TMT diversity has an influence on the relationship between cultural distance and M&A performance. Three hypotheses were developed to resolve the overarching research question. The first hypothesis assumed a negative impact of cultural distance on M&A performance. The second hypothesis introduced TMT gender diversity as a negative moderation effect. Finally, a positive influence of international experience in TMTs is considered on the relationship between cultural distance and M&A performance.
First, the relationship between cultural distance and M&A resulted in being insignificant. It cannot be concluded whether cultural distance has a negative effect on M&A performance. The results of the study support prior literature suggesting inconclusive findings. Some studies indicate a positive relationship between both constructs, whereas others predict a negative influence of cultural distance on M&A performance. It is difficult to explain the reason for the insignificance. However, prior literature argues that the relationship between cultural distance and M&A performance is more complex than expected. Mergers and acquisitions are structured as a complicated process, ranging from target selection to integration. The same complexity accounts for cultural distance. The construct consists of distinct cultural dimensions which might not be equally relevant in each stage of the M&A process. Thus, different dimensions of cultural distance might be applicable at different stages of the M&A process. The complex interrelationship of the constructs might explain the insignificant results of this study. A second reason for the insignificance of the relationship between cultural distance and M&A performance might be the measurement of performance based on secondary data. Beugelsdijk, Ambos, and Nell (2018) found evidence that cultural distance has more pronounced effects when it is assessed by qualitative measures. To conclude, possible reasons for the insignificance of cultural distance on M&A performance can be the underestimation of the complexity of both constructs and the quantitative assessment of cultural distance.
28 performance. Nonetheless, the regression results indicate a significant positive direct effect of TMT gender diversity on M&A performance, which contradicts the assumed negative notion of gender diversity in Chapter 3.2.1. Parola, Ellis, and Golden (2015, p. 59) describe gender diversity as a “double-edged sword” with positive and negative effects on organizational outcomes. For instance, the forming of in- and outgroups might impede group dynamics but at the same time raise competitiveness in the group which induces better-informed decision-making through intensified discussions and distinctive perspectives (Chen et al., 2016). However, in the context of cultural distance, this effect remains not significant. Bauer and Matzler (2014) argued that differences in organizational culture have a stronger effect than national culture. A reason for the insignificance of gender diversity on the relationship of cultural distance and M&A performance could, therefore, be that the organizational culture of acquirer and target is more important relative to cultural differences.
29 managers do not have much experience abroad could explain why international experience is not positively influencing the relationship between cultural distance and M&A performance.
7.1 Theoretical Implications
This study makes several contributions to existing literature. First, the paper intends to put cultural distance, M&A performance, and TMT diversity in context and demonstrate their interrelatedness. Prior studies linked the constructs together but barely jointly included them in a framework. Second, the study succeeded in demonstrating the effect of TMT international experience on M&A performance in culturally distant countries. Therefore, the study indicates the interdependency of cultural distance, M&A performance, and TMT diversity. Third, the study failed to support the relationship between cultural distance and M&A performance. The paper acknowledges the complexity of both constructs and agrees with the suggestions of prior studies to induce more research in this area. The same reasoning accounts for TMT gender diversity as a moderator of the relationship of cultural distance and M&A performance. The insignificance of the moderating effect raises again awareness for the need for future research. Fourth, prior studies related to TMT diversity indicate inconclusive findings. The empirical results of this study contribute to past research by empirically supporting the adverse effect of TMT international experience on the relationship between cultural distance and M&A performance. The findings align with papers indicating that diversity leads to conflicting team dynamics, which subsequently impairs performance (Bunderson & Van der Vegt, 2018). Finally, the study supports the upper echelon theory in demonstrating that TMT characteristics have an influence in the organizational context.
7.2 Practical Implications
30 beneficially contribute to M&A performance to countries which are culturally distant indicates that the work assignments of managers might not have always been positive. Therefore, the study encourages companies to support their managers on international assignments and question them in retrospect to improve future work assignments abroad.
7.3 Limitations and Future Research
The methodological approach of this study suffers from shortcomings which should be considered in future research.
First, this study relies on a sample of 235 M&A deals. Future studies should increase the sample size because a larger sample enhances the generalizability of the results. For instance, the sample size could be extended by examining industries beyond the manufacturing industry. A high number of M&A deals occur in the pharmaceutical industry (Kogut & Singh, 1988). Analyzing different industries might also shed light on differences between their approaches to succeed despite cultural distance. Furthermore, this study only considered US companies for the sample. Additionally, different continents or M&A deals from acquirers from emerging countries could reveal interesting patterns.
Second, this study aimed to look at mergers and acquisitions equally. Nevertheless, the sample only consisted out of acquisitions. For future research, it would be beneficial to look at mergers in detail. Mergers might suffer from more difficulties compared to acquisitions because they imply a higher involvement in organizational processes from both parties (Shenkar, 2001). Furthermore, future research should consider different forms of international expansions (e.g. joint ventures, international alliances or greenfield projects) to examine how TMT diversity can positively contribute to the relationship between cultural distance and organizational performance.
31 studies base the conceptualization of cultural distance on Hofstede data. In their paper Beugelsdijk, Ambos, and Nell (2018) revealed that using, for instance, Schwartz data or GLOBE data does not lead to different outcomes. Nonetheless, future research could use different data to calculate the KSIndex or any other distance measure to test the hypotheses of this study.
Fourth, M&A performance was not measured in equal periods. For instance, for a deal closing on the 01.02.2013 and another deal on 28.12.2013, Tobin’s q for the year 2015 was considered to measure M&A performance two years after the completion date. Future research should develop a more precise determination of the moment, where M&A performance should be measured. In addition, studies could look at Tobin’s q after three years or later as the effect of TMT gender diversity and international experience could be stronger over time. Different approaches in measuring M&A performance (e.g. ROA) could contribute to the findings of this study.
32
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i
9 Appendices
9.1 Appendix A: Cultural Distances from US to Target Country
ii 9.2 Appendix B: Sector and Year Frequencies
Sector Frequency
Chemicals, rubber, plastics, non-metallic
products 46
Food, beverages, tobacco 19
Machinery, equipment, furniture, recycling 158
Metals & metal products 3
Publishing, printing 3
Textiles, wearing apparel, leather 4
Wood, cork, paper 5
N=238 Year Frequency 2012 51 2013 47 2014 43 2015 60 2016 37 N=238
iii 9.4 Appendix D: Test of Assumption of Heteroscedasticity
Breusch-Pagan Test
p-value
Breusch-Pagan 1
iv 9.5 Appendix E: Test of Assumption of Normal Distribution
