Boards with More Women Pay Less for Acquisitions

Companies that have more women on their boards of directors make fewer bids for mergers and acquisitions — and pay less for acquired companies. That’s the finding from a new paper (Levi, Li, and Zhang, 2013) by Maurice Levi and Kai Li of the Sauder School of Business at the University of British Columbia and Feng Zhang at the David Eccles School of Business at the University of Utah.

Professor Li, defend your research. What makes M&A activity and boards ideally suited to a study of gender and leadership behavior?

Li: There are three main reasons. First, M&A is a very important corporate decision that can make or break a company. Many have been catastrophic — just think of the classic example, AOL and Time Warner. So it clearly called for further scrutiny: most companies barely break even on these deals, so why do they still go ahead with them? And are there any mitigating forces that reduce a company’s tendency to be acquisitive and thus better protect shareholder interests?

Second, M&As are different than regular organic growth in that completing such a deal is associated with much greater uncertainty. You’re buying an unknown entity, possibly also entering a new market. Past research, which we cite, has shown that men and women behave differently when faced with uncertainty in terms of how overconfident they are. Everyone is overconfident — we always think we are better than our true selves — and when men and women are dealing with knowns they tend to be fairly similar in that regard as well. But when they are looking at unknowns, or when feedback is delayed or uncertain instead of specific and immediate, women demonstrate less overconfidence than men. So the M&A setting is an ideal setting in terms of how it amplifies gender differences in responding to uncertainty with overconfidence.

The third reason is that while a board is not engaged in day-to-day operations like a CEO, it is very involved in M&A decision making and in the deal making process. It’s more likely that a single voice from a female director would be heard, and that we could be able to capture that.

Women make up such a small percentage of directors. Is that really enough of a sample size to be able to tell what’s going on?

Actually, this research has evolved over time — at the very beginning we were very ambitious and were just looking at the very top females in the corporate hierarchy, female CEOs. But they are just so few in number that we didn’t have enough to go on. But women make up about 10% of boards of directors. A typical board is about 10 people, so a majority of U.S. companies have at least one female director. So in that sense, compared with female CEOs, there are many more of them. And while that is still a small number, it’s growing because of increasing awareness and because there are so many female students in business education, both MBA programs and undergraduate programs, and they are climbing up the corporate hierarchy.

Most M&As fail, so from that perspective it sounds like fewer and smaller takeover bids is actually a good thing. But in part of the paper you conclude that there’s no evidence that women are “better monitors.” What do you mean by that?

That’s derived from other work [Chen, Harford, and Li, 2007] where we look at institutional investors and stock price reactions to deal announcements. If female directors are good monitors they would be monitoring how things proceed after the deal is announced. If you announce your takeover bid and your stock drops 20%, if you are a good monitor you might use the time between the announcement and the deal going through to revise the deal or cancel it. But we saw no difference in how men or women responded to negative market reactions to an M&A — once the board has made their decision, they generally just go ahead with it.

In the paper you write that each woman on a board reduces likelihood of an acquisition bid being made by 7.6% and reduces the bid premium of any takeover bid by 15.4%. At what point would that stabilize? For instance, if you had a board that was 100% female it’s tough to imagine they would never make any takeover bids.

A 100% female board is almost a counterfactual, while 100% male boards are a fact of life. So for a statistician that is really difficult to measure.

But we did see a nonlinear effect to having multiple women on a board; having two women produces a stronger effect than having a single female director. Having multiple women present, versus a lone voice, means that they can reinforce each other and also make it more likely that their views will be heard.

But so few boards have more than two women, we don’t know what would really happen after that, if the effect would keep compounding or if it would plateau.

Do female directors correlate with decreases in other risky activities?

In fact, we did find a similar result in R&D spending and capital expenditures — female board members also correlate negatively with those activities. That’s for the same reasons about overconfidence and uncertainty that effect M&As.

Did you find any differences in the kind of men who were more or less likely to move ahead with a risky M&A deal?

In a previous paper [Levi, Li, and Zhang, 2010] we did examine the role of testosterone in M&As. Testosterone increases your combativeness and dominance-seeking, and younger male CEOs with more of the hormone were more acquisitive than older CEOs, who didn’t have as much. If you’ve got more testosterone and it’s increasing your sense of dominance, then you want to buy companies and build a bigger empire.

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