Investors' time preferences and takeover performance

Abstract

We investigate investors' time preferences and takeover outcomes in a cross-disciplinary international study. We use a cultural measure on long-term orientation (LTO) to capture investors' time preferences. Additionally, we study how investor protection and the nature of the deal (cross-border vs domestic) in connection with investors' time preferences come into play in explaining long-term takeover performance. Evaluating data on 38,153 M&A deals from 54 countries, over the period from 2000 to 2015, we offer empirical evidence that investors' future orientation significantly improves post-M&A performance, while short-term oriented behavior deteriorates takeover performance. Our findings further suggest that the positive impact of investors' future orientation on takeover performance is more pronounced in countries with strong investor protection. Moreover, the impact of investors' time preferences is stronger for domestic deals where the confounding impact of cultural differences is almost non-existent.

Introduction

In the era of global competition, mergers and acquisitions (M&As) are among the fastest strategic choices opted for to be competitive in the market. However, we observe a high rate of mergers and acquisitions failure owing to cultural differences, post-merger integration problems, and agency issues mainly. We try to add to the current literature in this direction to better ascertain the underlying reasons for poor M&As outcomes, however, from a somewhat different perspective. Our goal is to see through the temporal lenses of the acquiring companies' investors [hereafter termed as ‘investor(s)’] to better comprehend how their time preferences affect post-merger takeover performance.

The notion of ‘time’ – no matter how abstract it may sound - has gained extensive attention in the literature regarding corporate theory and strategy. Time has been considered one of the main concepts that shape human behavior in general (Galor & Özak, 2016), and economic behavior in particular (Chen, 2013). The selection between current consumption and delayed gratification outlines many human choices ranging from personal to managerial level decisions and consequently exerts a great impact on related outcomes. Probing into time preferences is therefore of utmost importance not only to understand individual decision-making, but also to comprehend how individual decision-making consequently affects corporate behavior and strategy formulation.

The literature in this regard mainly shows the general relevance of time preferences for economic behavior (e.g. Chang & Noorbakhsh, 2009; Newman & Nollen, 1996). We find evidence with respect to time preferences at the organizational level (Antonczyk, Breuer, & Salzmann, 2014; Buck, Liu, & Ott, 2010; Harris & Siebert, 2017), however, to some degree, investors' time preferences have been neglected in the empirical corporate finance literature in general (exceptions are Howlett, Kees, & Kemp, 2008, and Flammer & Bansal, 2017) and in the mergers and acquisitions related literature in particular with Gaspor, Massa, and Matos (2005) and Chen, Harford, and Li (2007) being notable exceptions. Gaspor et al. (2005) and Chen et al. (2007) have studied the impact of institutional investors' investment horizons mainly in connection with corporate control and monitoring. Their results also link long-term underperformance of acquirers to short-term oriented shareholders. However, both studies are restricted to the US and are considering mainly institutional investors with an ability to exert corporate control. The impact of the temporal preferences of a general investor base is not studied extensively. This is because investors' temporal orientation is difficult to observe, thus making it very challenging to substantiate the likely impact of time orientation on firm performance empirically. The current study takes on the challenge and tries to establish a vigorous research design to investigate the potential influence of investors' time preferences on long-term takeover performance in an international context.

It is argued that economic choices are largely dependent on the selection between current and future gratification, which is determined by decision-makers' time preferences (Anderhub, Güth, Gneezy, & Sonsino, 2001; Frederick, 2003). Stout (2012) points out that though long-term orientation is assumed to be associated with greater gains, organizations are still found to pursue short-term goals and forgo projects yielding positive net present values only because they may cause a reduction in short-term profits (Graham, Harvey, & Rajgopal, 2005). It is quite a contrasting and intriguing finding at the same time that even though theory claims long-term orientation to be generally value-maximizing, organizations still focus on short-term gains. This difference between theory and practice may not only be due to the lack of some convincing empirical validation of benefits associated with long-term orientation, but also due to the absence of proper investor protection prohibiting managers from indulging in value destroying short-term strategies.

Against this background, we mainly seek to provide clear evidence of a positive impact of investors' long-term orientation on an acquirer's post-acquisition performance. In additional analyses, we address the issue of investor protection in connection with investors' time preferences and show that the positive impact of investors' time preferences on takeover performance is stronger for higher levels of investor protection.

The rest of the paper is organized as follows. We discuss the theoretical framework and hypotheses development in Section 2. Data and research methods employed are described in Section 3, while empirical findings are presented in Section 4. Several robustness checks are carried out in Section 5, whereas in Section 6 we additionally investigate the impact of investor protection and the differences between cross-border and domestic deals in explaining the impact of time preferences. Finally, conclusions are delineated in the closing section.