Abstract

     Firms with good management optimize and synthesize human resources, leadership, and technical and conceptual skills to enhance firm value. In this paper, we examine the role of management in merger and acquisition (M&A) decisions. M&A decisions are among the most important corporate decisions, on which firms spend a lot of resources and managerial qualities. We estimate management as a latent variable using a structural equation production model and Bayesian techniques. The key advantage of the Bayesian approach is the use of informative priors from survey-based management estimation methods, which are however available for a limited number of firms. Subsequently, we examine the effect of management on takeover events. We first show that management, on average, increases the probability of M&A deals. However, we also uncover a nonlinear U-shaped effect, which is consistent with the theoretical premise that poor management leads to many value-decreasing M&A deals, whereas good management leads to many value-increasing M&A deals.

Introduction

     Mergers and acquisitions (M&As) are among the most important decisions of enterprises. A successful M&A leads to improved productivity and performance, whereas an unsuccessful one leads to chronic operational problems and inferior performance (e.g., Arocena, Saal, Urakami & Zschille, 2020; Chen, Xu & Zou, 2017). Firms spend approximately USD 4 trillion every year in their effort to maximize the firm value via M&As, but 70% of these events do not meet the goals originally set. A recent line of literature (Delis, Iosifidi, Kazakis, Ongena & Tsionas, 2022; references therein) emphasizes the importance of management on the performance of M&As. However, the first key step on M&A value creation is whether and how firms decide on M&As.

     Identifying the role of management as a determinant of M&As is a significant, but still unexplored research question. Firms with good management are those that optimize three key characteristics: Human resource management and leadership, technical abilities including human and intellectual capital, and conceptual skills to develop ideas from abstract thoughts (Delis & Tsionas, 2018; Katz, 1974). Thus, we consider management as a general firm-wide concept that effectively encompasses the future position and strategy of the firm; this naturally includes M&A decisions.

Conclusion

     Management and M&A decisions theoretically go hand-in-hand. Firms with good management target value-enhancing M&A deals, whereas firms with poor management target value-decreasing M&A deals. Both groups of firms might thus conduct more M&A deals. In this study, we examine this hypothesis using more than 15,000 M&A events over the period 1980–۲۰۱۶٫ We estimate management using a structural equation model, which includes management as a latent input of production. For the estimation method, we resort to a Bayesian approach that involves an artificial neural network process for the identification of management, and we obtain inferences from MCMC.