Do financially trained managers make better deals? Evidence from mergers and acquisitions

• Published date: 01 April 2022
• Author: Peter Dadalt,Dana Zhang
• Date: 01 April 2022
• DOI: http://doi.org/10.1002/jcaf.22538

Received:  November Accepted:  January 

DOI: ./jcaf.

RESEARCH ARTICLE

Do financially trained managers make better deals?

Evidence from mergers and acquisitions

Peter DadaltDana Zhang

Sigmund Weis School of Business,

Susquehanna University, Selinsgrove,

Pennsylvania, USA

Correspondence

DanaZhang, Sigmund Weis School of

Business,Susquehanna University,

Selinsgrove,PA, USA.

Email:zhangd@susqu.edu

Abstract

We examine whether the proportion of financially trained managers (FTMs) in

the top management team affects firms’ merger and acquisition (M&A) deci-

sions. We find that firms with a higher proportion of FTMs are more likely to

pursue acquisitions in unrelated industries. In addition, these firms report poorer

accounting profitability and stock returns during the -year period following the

acquisition. These findings indicate that in addition to the firm and deal-specific

characteristics focused on in prior studies, characteristics of the top management

team also play an important role in determining the type and quality of firms’

acquisition decisions.

KEYWORDS

diversification, merger and acquisition, post-acquisition performance, top management team

1 INTRODUCTION

In the early s, aggregate annual merger and acquisi-

tion (M&A) transactions in the US totaled less than $ bil-

lion (Golbe & White, ). In , this figure reached

an all-time high of over $ trillion, accounting for more

than % of worldwide transaction volume (Farrell, ).

Some attribute this increase in M&A activity in part to the

increasing number of top managers with financial back-

grounds. Hayes and Abernathy () note that the typi-

cal career path has changed from a series of internal pro-

motions with appointments in several functional areas

to one where top managers at large US corporations are

hired from outside the firm. Consequently, management

teams are increasingly staffed primarily with managers

with financial expertise acquired through their careers at

multiple firms.

There is little empirical evidence about how having

a greater concentration of financially trained managers

(henceforth FTMs) affects firms’ M&A activities. Weexam-

ine two facets of this issue: first, whether firms with a

higher percentage of FTMs are more prone to make diver-

sifying acquisitions than their less finance-heavy counter-

parts. And second, we assess how acquisitions made by

these firms perform relative to those made by firms with

a lower concentration of FTMs.

There are several reasons why FTMs might be more

prone to pursuing diversifying acquisitions. The first

comes from a risk-reduction perspective. Aggarwal and

Samwick (), Amihud and Lev (),andBilletetal.

() all provide evidence that diversifying acquisitions

result in decreased levels of firm risk. Since managers face

nondiversifiable employment risk, they have incentives

to pursue corporate risk-reducing strategies (May, ).

Based on their training and experiences, FTMs may be

more concerned about risk management and more aware

of the effects of diversification, which may result in a

higher likelihood of diversifying acquisitions.

In addition to reducing firm risk, compensation policies

appear to reward management of more diversified firms.

Rose and Shepard ()findthattopmanagementof

diversified firms receive significantly higher compensation

than those of similar undiversified firms. Likewise, Fields

et al. () find that a positive association between firm

complexity and director compensation. If this relationship

extends to non-director management, it would imply that

J Corp Account Finance. ;:–. © Wiley Periodicals LLC113wileyonlinelibrary.com/journal/jcaf

114 DADALT  ZH ANG

sophisticated managers would prefer diversifying acquisi-

tions. To the extent that FTMs are more likely to perceive

these benefits, a higher concentration of FTMs could result

in a greater propensity to pursue diversifying acquisitions.

Behavioral bias of FTMs may also lead to morediversify-

ing acquisitions. Managers from different functional tracks

likely have different belief structures. It has been doc-

umented that when managers from different functional

backgrounds are presented with the same problem, they

define the goals and strategies largely in their own area of

expertise (Dearborn & Simon, ). Unlike managers with

backgrounds such as production, operation, and research,

the expertise and skills of FTMs are not tied up to a spe-

cific industry. As a result, FTMs may be more willing to

step into new territories and pursue growth opportunities

in new businesses.

In terms of the success of M&A transactions, there are

arguments from both sides. On one hand, FTMs may be

more proficient in structuring M&A deals. Given their

knowledge and experiences, they may be more capable of

selecting the right target, negotiating cheaper price, and

identifying better timing to enter into the market. On the

other hand, FTMs may overlook many practical issues

due to their lack of hands-on experiences in important

functional areas such as R&D, production, and operation,

which may result in overestimation of synergies and prob-

lems during the execution of the merger of two companies.

As a result, it is ex ante unclear whether FTMs will make

better deals that increase the value of the company in the

long run.

Weempirically examine these issues through an analysis

of  mergers and acquisitions initiated by S&P  firms

from  to . We focus on acquisitions by S&P 

firms because the information regarding top managers’

functional backgrounds are more accessible. We hand-

collect the functional backgrounds of the top managers of

the acquiring firms from BoardEx, disclosures in -Ks and

proxy statements, and company websites. Top managers

are defined as all executive officers disclosed in the -K

of the firm. This includes the firm’s president, vice pres-

idents in charge of principal business units, divisions or

functions, and any other officer who performs a policy-

making function according to Rule b- in the Exchange

Act. We classify top managers as financially trained if they

spent the majority of their career in finance or accounting-

related positions. We then calculate the percentage of top

managers that are FTMs for each acquiring firm in the year

of acquisition announcement.

The results of our analyses suggest that a higher concen-

tration of FTMs affects firms’ takeover outcomes in two

ways. First, firms with a higher percentage of FTMs are

more likely to acquire targets in unrelated industries (i.e.,

those where the target firm does not share any four-digit

or two-digit SIC codes with the acquiring firm). Second,

acquisitions by these firms exhibit lower post-acquisition

abnormal returns and industry-median-adjusted ROAs for

up to  years following the completion of the acquisition.

This study contributes to the M&A literature in several

ways. Our results suggest that in addition to the firm and

deal characteristics examined in prior studies, character-

istics of the acquiring firms’ top management team also

help explain both the choice between targets in related

versus unrelated industries and the post-acquisition per-

formance of the firm. We also contribute to the literature

on corporate diversification strategies. The results suggest

that there might be some behavioral bias that FTMs are

more subject to. The findings could be relevantto the board

of directors in their selection and monitoring of top man-

agers.

The remainder of the paper is organized as follows. Sec-

tion reviews relevant literature and develops hypotheses.

Section presents sample selection and research design.

Section discusses results with additional tests in Section 

and concludes.

2HYPOTHESIS DEVELOPMENT

Researchers generally find that corporate takeovers are

associated with short-term wealth effects that range from

minimal (Andrade et al., ; Jensen & Ruback, )

to negative (Andrade et al., ; Moeller et al., ).

Researchers find similar mixed evidence on the post-

acquisition performance of acquiring firms. Franks et al.

() report that acquiring-firm shareholders earn normal

returns over the -year period following takeovers. In con-

trast, Magenheim and Mueller () find that acquirers

underperform in the -year period following an acquisi-

tion.

Researchers have examined a variety of factors in

attempts to explain post-acquisition underperformance on

the part of acquirers. Morck et al. () and Rau and

Vermaelen () find that low book-to-market acquir-

ers experience sub-par post-acquisition returns. Meggin-

son et al. () find that post-acquisition bidder returns

are lower for firms that engage in diversifying acquisi-

tions and/or use equity as a means of payment. Finally,

Louis ()andGongetal.() provide evidence

that firms engaging in income-increasing earnings man-

agement prior to the acquisition experience poorer post-

acquisition performance.

In contrast to the information on acquirer and deal char-

acteristics, relatively little analysis has been done on the

role played by the acquiring firm’s managers in the success

of an M&A transaction. Acquiring firm’s management

selects the target, negotiates the terms of the transaction,