High testosterone levels in CEOs negotiating mergers and acquisitions are linked to a higher rate of dropped deals and an increase in hostile takeover attempts, according to a new study in the current issue of Management Science, a journal of the Institute for Operations Research and the Management Sciences (INFORMS®).
“Deal or No Deal: Hormones and the Mergers and Acquisitions Game” is by Maurice Levi, Kai Li, and Feng Zhang of the Sauder School of Business at the University of British Columbia. The study appears in the current issue of Management Science.
A podcast interview with Prof. Levi is at www.scienceofbetter.org/podcast/levi.html.
Although observers might expect M&A bids to follow analysis of business advantage, the authors find that more human factors are also at work.
“We find a strong association between male CEOs being young and their withdrawal rate of initiated M&As,” the authors say, characterizing these rejectionist younger executives as showing dominance-seeking behavior. “High testosterone responders tend to reject low offers even though this is against their interest.”
Younger CEOs are 4% more likely to initiate an attempt to acquire another company than older men, the study finds. In a more marked finding, male CEOs’ relative youth increases their likelihood of withdrawing a merger/acquisition bid by as much as 20%.
The authors also find that when companies being approached about a merger or acquisition have younger CEOs, there is a greater likelihood — by 2% – of a tender offer. Tender offers are used by bidding companies to bypass targeted companies’ leadership and directly contact stockholders to purchase controlling shares.
In the study, the main effect of high testosterone was upon CEOs on the bidding side of negotiations to acquire another company, not the CEOs of the target company. Nevertheless, target CEOs’ testosterone levels featured prominently when their refusal to continue negotiations led to a hostile takeover attempt.
The study builds upon a 2007 experiment conducted among students by Terence C. Burnham of Harvard University. In the two-player game, each team must agree how to divide a sum of “free” money or lose the entire sum. In this “ultimatum” game, high-testosterone men were more likely to reject what they perceived as low offers.
In the Burnham experiment, saliva from participants’ mouths was swabbed to measure testosterone levels. In the current paper, age is used as a proxy for testosterone.
The current authors use data from Thomson’s SDC database for more than 350 acquisition bids during the ten-year period from 1997-2007 to test the behavior of ‘bidder’ male CEOs. The average age of bidding firm males was 56 years old. The authors categorized CEO’s under age 45 as young for the purposes of this study.
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The Institute for Operations Research and the Management Sciences (INFORMS®) is an international scientific society with 10,000 members, including Nobel Prize laureates, dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, financial engineering, and telecommunications. INFORMS serves the scientific and professional needs of operations research analysts, experts in analytics, consultants, scientists, students, educators, and managers, as well as their institutions, by publishing a variety of journals that describe the latest research in operations research. INFORMS Online (IOL) is at www.informs.org. Further information about operations research can be found at www.scienceofbetter.org.
INFORMS journals are strongly cited in numerous industry sources. BusinessWeek has added a fourth INFORMS journal to its list of journals used to determine the world’s best business schools making INFORMS the scientific association with the largest number of scholarly journals on the prestigious list. The Financial Times includes four INFORMS journals in its list of academic journals used to evaluate and rank MBA programs. The ERA 2010 journal list available on the Australian Research Council (ARC) website gave 8 of the 12 INFORMS journals A rankings. The research influence and impact of INFORMS journals is measured by Thomson Reuters and is made available in their Journal Citation Reports. Several of our journals are ranked in the top 10 percent of their subject categories.
About the Sauder School of Business
The Sauder School of Business at the University of British Columbia is Canada’s leading academic business school, recognized globally for its contributions to the transformation of business practices through innovative research and teaching. The school has over 31,000 alumni in 74 countries around the world.