Value-based Management and Merger & Acquisition Returns: A Multi-level Contingency Model

Abstract

Whereas the performance effects of value-based management (VBM) have been intensively addressed in previous research, little is known regarding whether—and which—specific managerial decisions are improved by VBM. In this study, we take advantage of merger and acquisition (M&A) decisions that allow us to analyze a specific managerial decision with a direct assessment by the capital market. Moreover, to better grasp the underlying mechanisms of VBM, we consider potential contingency factors that may affect the relationship between VBM and M&As. Specifically, we examine the risk of managerial self-interest in M&A decisions that may be influenced by a firm's internal, industry- and country-specific contexts. We gather VBM data of firms from the Standard & Poor's 500 Index and the MSCI Europe Index between 2005 and 2011, and combine the data with deal data resulting in a sample of 2787 deals. Our empirical results do not indicate a positive direct effect from VBM on M&A returns. However, we find that VBM leads to superior M&A returns in the presence of contingency factors that increase the risk for self-interested managerial decisions.

Keywords:

• Value-based management
• Mergers & acquisitions
• Event study
• Managerial self-interest

JEL classifications:

• M41
• G34

Acknowledgements

We thank associate editor Sally Widener and two anonymous reviewers for their constructive comments throughout the review process. Additionally, we appreciate the feedback from the participants and faculty of the EAA's 2016 doctoral colloquium in Maastricht, session participants at the Annual Meeting of the Academy of Management (AOM) in Anaheim 2016 and session participants and the discussant (Markus Pudelko) at the Annual Meeting of the German Academic Association for Business Research (VHB) in Vienna 2015.

Notes

1 Tortella and Brusco (2003) highlight several prominent VBM adopters who stress the importance of VBM as a management technique in business practice. Motivated by this practical relevance, Haspeslagh, Noda, and Boulos (2001) summarize the initial results of VBM adopters. They outline examples both of success stories and of corporations that only achieved mediocre results.

2 For a similar reason, a recent study by Knauer, Silge, and Sommer (2018) adopted an event-study methodology to investigate the impact of VBM on M&A and divestiture returns in a German setting.

3 Based on a German sample, Knauer et al. (2018) document a positive association between VBM and M&A returns and a non-significant association between VBM and divestiture returns. They argue that VBM provides more benefits in the context of acquisitions as these decisions are more prone to managerial self-interest than divestitures. The results of our cross-country study did not show a direct and positive effect of VBM on M&A returns. However, similar to the arguments of Knauer et al. (2018), we find that VBM has a positive association with M&A returns in situations where self-interested M&A decisions of managers are more likely to occur.

4 Similar to Bens et al. (2012), we argue that the M&A announcement returns (being one of the most significant corporate investment decisions) can provide a direct assessment regarding the quality of managerial decisions, unlike annual stock returns that can vary for different reasons.

5 Moreover, we ran 11-day (−5, +5) CARs as a robustness check and yielded similar results.

6 To gain a better understanding of the criteria, we included examples of when a firm fulfilled and not fullfilled the requirements to be codified as a VBM firm (refer to Table A2 of the Appendix).

7 http://data.worldbank.org/indicator/CM.MKT.LCAP.GD.ZS

8 The Thomson Reuters Asset4 dataset has been recently used in empirical management studies (Cheng, Ioannou, & Serafeim, 2014; Lys, Naughton, & Wang, 2015) and is also extensively used for investment purposes by professionals.

9 Financial-oriented investors include investment companies, independent investment advisors, hedge funds, and pension funds.

10 We exclude industry (country) fixed effects when analyzing the impact of the moderator variable at the industry (country) level. However, we also test a full model where industry and country fixed effects, as well as all our moderator and interaction variables are included. By adding industry and country fixed effects into the regression besides our moderator variables on the industry and country level, we follow Hillier, Pindado, Queiroz, and de la Torre (2011) and Mihet (2013), who suggest that this approach helps to decompose the fixed (country) effects from the error term.

11 Industry and country fixed effects generally do not explain a large part of the results. Hence, similar to research studying effects of country (industry) variables while including country (industry) fixed effects (Galasso & Simcoe, 2011; Giroud & Mueller, 2011), we test models with and without both fixed effects.

12 Regarding FCF, we again used free cash flow divided by total assets but without any industry adjustment (Dey, 2008). The alternative for industry competition is proxied by the Herfindahl–Hirschmann Index (HHI) (Hirschman, 1945), which is a frequently utilized market competition proxy (Ammann et al., 2013; Custódio, 2014; Geletkanycz & Boyd, 2011). The alternative equity availability measure refers to market turnover as a proxy of market liquidity (Chan et al., 2005). It is calculated by dividing the total value of shares traded to GDP for a given market during a set period.

13 Industry averages of the independent variable are frequently used as instrumental variables in previous research (Chen, Chen, & Wei, 2011; Chen, Huang, & Wei, 2013).

14 Our reverse regressions mentioned in the robustness section do not document a significant influence of our moderating variables on the use of VBM.