National Culture and Takeover Contest Outcomes

DOIhttp://doi.org/10.1111/fire.12158
Date01 August 2018
AuthorMagnus Blomkvist,Timo Korkeamäki,Karl Felixson
Published date01 August 2018
The Financial Review 53 (2018) 605–625
National Culture and Takeover Contest
Outcomes
Magnus Blomkvist
Audencia Business School - Nantes
Karl Felixson
Hanken School of Economics
Timo Korkeam¨
aki
Hanken School of Economics
Abstract
We examine the effects of cultural differences on the outcome of takeover contests.
Our main focus is on individuality, which we posit to have an effect on firm behavior in
international takeover contests. In a sample of international acquisitions with bidders from
multiple countries, we find that individuality positively relates to the probability of placing
the winning bid. We further find that takeover contest winners with high individuality scores
experience lower announcement returns. Our results are consistent with the literature that links
individuality to overconfidence.Our evidence suggests that firms should control culture-related
behavioral biases in their mergers and acquisitions activity.
Keywords: mergers and acquisitions, culture, takeover contests
JEL Classifications: G32, G34, G41
Corresponding author: Hanken School of Economics, Department of Finance and Statistics, P.O. Box
479, 00101 Helsinki, Finland; Phone +358 40 3521 308; E-mail: timo.korkeamaki@hanken.fi.
We thank Stephen Gates, and an anonymous refereefor helpful comments.
C2018 The Eastern Finance Association 605
606 M. Blomkvist et al./The Financial Review 53 (2018) 605–625
1. Introduction
Cross-border acquisitions differ from domestic acquisitions in terms of both
challenges and potential for value creation. It is well documented that stock reactions
to cross-border acquisitions are inferior to stock reactions to domestic acquisitions
(Eckbo and Thorburn, 2000; Moeller and Schlingemann, 2005), with market segmen-
tation explaining part of the observed cross-border discount (Francis, Hasan and Sun,
2008). Several studies indicate that culture affects the willingness to conduct mergers
and acquisitions (M&A) transactions. For instance, Kogut and Singh (1988) study the
effects of national culture on the Foreign Direct Investment (FDI) entry mode. They
note that while a firm-level metric on culture would be preferable, the country-level
measures by Hofstede (2001) explain remarkably well the choices made by firms
in their foreign expansion. In a recent paper, Ahern, Daminelli and Fracassi (2015)
note that culture plays a role in both target choice and in market reactions to merger
announcements. However, the impact of cultural aspects on takeover contests with
multiple bidders has largely been neglected in previous literature. We fill that gap
with this study.
We use a novel setting of international acquisitions with at least two competing
bidders. In order to observe the effects of international variation in culture, we study
only contests where heterogeneity exists among bidder nationalities. Among different
cultural dimensions, our main focus is on the role of a particular cultural aspect, that
is, individuality, and its effect on both the outcome of the competition as well as
the acquirer announcement returns. Our main measure of individuality is Hofstede’s
(2001) individuality index. The individuality index measures the extent to which
the society is made up of individuals who mainly look after themselves. A low
level of the index indicates collective societies, where individuals are loyal to the
group, and where everyone is expected to do his/her part to benefit the society. Chui,
Titman and Wei (2010) use the same index as a measure of overconfidence and self-
attribution bias. They present compelling arguments for the connection between the
individuality index and overconfidence. Ferris, Jayraman and Sabherwal (2013) also
report a significant positive correlation between CEO overconfidenceand Hofstede’s
(2001) individuality measure.
Wemake two predictions regarding bidders from countries with high individual-
ity scores. First, based on the aforementioned notion that individuality relates to over-
confidence, we expect bidders from more individualistic cultures to be more likely to
win bidding contests. This expectation is further strengthened by Volkema’s (2004)
results that high values on Hofstede’s (2001) individuality measure relate to aggres-
sive and even unethical behavior in competitive situations. If bidders from countries
with high individualism scores behave in an overconfident manner in bidding con-
tests, we also expect those bidders to be more likely to overpay for their targets. We
consider this by studying stock market reactions to acquisition announcements.
Our results match our expectations. First, we find that bidders from more in-
dividualistic countries win takeover contests more frequently than what would be

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