An Empirical Study on Managerial Ability of Acquiring Firms: M&A Behavior and Outcome
Student thesis: Doctoral Thesis
Related Research Unit(s)
|Award date||3 Aug 2016|
Mergers and acquisitions (M&A) are arguably highly popular strategy and investment decisions among firms which seek corporate growth or to strengthen the competitive advantages over their rivals. A prevailing view in the business press and among managers themselves is that top management teams are one of the most, if not the most key factor in the determination of corporate decisions. In the case of acquisition, superior managerial ability plays a strategic role in successfully managing important growth strategies through M&A and maximizing the synergistic benefits of acquisition. In this thesis, I investigate the impact of managerial ability of acquiring firms on growth strategies through M&A and post-acquisition performance. M&A provides a cheaper route for firms to realize growth and facilitate the reallocation of resources. The ability of management teams to reconfigure the resources of the combined firms and handle the potential risks varies a lot across different firms. Therefore, the engagement in acquisition activity and post-acquisition performance will also be totally different according to heterogeneity of management teams. The first essay examines the impact of the managerial ability of acquiring firms on the growth strategies through M&A. I investigate three aspects including the engagement in acquisition, target growth preference and horizontal- vs. diversified-acquisition decisions. Empirical results show that when acquiring firms' managerial ability is high, the probabilities of opting for acquisition and serial acquisitions are both high. Furthermore, I also find that superior managers prefer to choose high asset growth firms as their targets especially if their own growth is lower. Finally, my study tests whether more able managers are more likely to realize growth through expanding to acquire inter-industry targets or strengthening business lines in targeting intra-industry peers. The finding indicates that more able managers prefer to engage in horizontal (intra-industry) acquisitions due to their expertise advantages in the same industry. After realizing that the managerial ability of acquiring firms indeed does matter regarding firms' future growth through M&A decisions, I further analyze how the managerial ability of acquiring firms affects post-acquisition performance in the second essay. Firstly, I find that post-acquisition performance is positively associated with acquiring firms' managerial ability. Specifically, when acquiring firms' managerial ability is superior, their long-run post-acquisition market return and accounting performance are both higher. Furthermore, I find that firms with more able managers are more likely to pay a large portion of cash to targets. Finally, my cross-sectional analyses show that the positive effect of managerial ability on performance is more pronounced when acquiring firm and target firm are in the same industry or acquirers have experience in serial acquisitions. The findings are consistent with the premises that managerial ability is an important source of value creation in M&A and that superior managers are more able to realize greater synergy and benefits from M&A. Overall, the findings in this dissertation contribute to the literature by linking M&A activities and the ability and usefulness of acquiring firms' management teams. This work provides more understanding of the value of managerial ability in relation to acquisition decisions and post-acquisition performance.