Influence of CEO's personal characteristics on short-term M&A performance in Russia

1.8 Managerial activity as a factor of success or failure of M&A

Top management teams, senior executives and CEOs are considered to be one of the most important factors that influence the corporate decisions that result into better or worse business performance, as these people are responsible for making decisions about financing of the company, investments and strategy (Cui & Leung, 2020). Managers and CEOs are crucial members of M&A deals processes as they make decisions about the most difficult tasks in merged companies, about their combined resources and their distribution. Furthermore, these top managers have to handle the potential cultural and personnel conflicts among employees and other managers (Bertrand and Schoar, 2003; Holcomb et al., 2009).

According to Cui and Leung (2020), managerial abilities more often consist of three main categories of knowledge that differ by the relevance to the fields of market context and by the level of transferability: firm-specific, industry-specific and general. General knowledge is the most transferable by the definition, while industry-specific knowledge narrows the field and deepens a person into the certain industry. Firm-specific knowledge is the most narrowly targeted as firm is a specific member of the certain industry and market in general. That is why horizontal M&As are considered to be less complex and demanding for managers than cross-industrial transactions because the latest occur between different market segments and thus demand industry-specific knowledge about target sector as well. Cui and Leung (2020) found out that industry-specific knowledge, experience and skills are more crucial for the management team of the company-acquirer for managing the combined operations and resources of the M&A. Managerial skills are hard to estimate precisely and it is still unclear whether there is a correlation between ability of managers to generate higher revenues and their potential ability to handle effective decisions about combined resources and activity that result with better post-transaction performance. However, Cui and Leung (2020) conduct a research which results show that acquirers whose managers have better managerial abilities have better values of financial indicators such as industry-adjusted ROA, operating cash flows, and market-to-book ratio in long-term period of 1-3 years after the M&A transaction but there was no interconnection with post-M&A stock returns. Thus, these results support the conclusion that high managerial abilities of the firm-acquirer play significant role in gaining of improved long-term performance and M&A synergy effect. However, such results are more applicable to the M&A deals within the same industry, not in cross-industry transactions as manager can apply his or her abilities better if he or she support it with using of the specific knowledge about industry he or she works in (Cui & Leung, 2020).

Nevertheless, Chen and Lin (2018) persist on the fact that superior managers have a developed ability to distinguish potentially successful and unsuccessful deals as they may be more experienced in these activities. At the same time Cui and Leung (2020) claim that qualified superior managers have better skills in resolving cultural and personal misunderstandings, work with combined assets and other resources, thus, lead to the better post M&A synergy effect. One of the reasons of M&A deal failure are wrong estimation and analysis of the target company, lack of attention to its debt and problematic integration process, that was made by not enough qualified managers (Cui & Leung, 2020). In addition, Bertrand and Schoar (2003) claim that abilities of not only superior managers (CEOs, CFOs) are important for the success of the M&A transaction but the whole management team should be included into the process in order to gain the higher M&A performance. They also say that able managers collect more needed information, both private and public, undertake non-risky target firms with valuable resources and have an ability to negotiate their further usage. Demerjian et al. (2013) also add that these managers are more aware of macro-economic conditions and their client bases and do not over- or under- estimate the risks in terms of financial indicators.

Chikh and Filbien (2011) mention that dual CEOs with higher ownership level and those, who have more experience in working with M&A deals, pay more attention to the reaction from investors, considering the M&A activity, and if the stock returns turn to be negative, these CEOs cancel the transaction as soon as possible due to their higher qualification.

Some previous studies consider educational background of the CEO as one of the variables. For instance, Malmendier and Tate (2008) take professional education as one of the CEO's characteristics, influencing the M&As. They classify this factor on several groups: technological, financial (including business and economics) and other types of professional education. The results of their research show that financial educational background positively affects the acquisition performance. Chikh and Filbien (2011) refer to educational connections as a possible way of getting the right information that is needed for correct estimation of the decisions about the preparing deal. At the same time, Kilian & Schindler (2014) find that most of the M&A deals are made by CEOs with educational background and some CEOs even have double-degrees. Betrand and Schoar (2003) note that CEOs with MBA (double degree) are more confident and thus thrive to use their knowledge even in aggressive way of behavior. Authors say that such CEOs are more active in terms of M&As as they want to maintain their reputation as a confident professional. However, Lucey, Plaksina and Dowling (2013) think the opposite - CEOs with MBA degrees are more cautious when dealing with the acquisitions as they are afraid of losing their professional reputation.

Deloitte research (2012) emphasizes that in 70% cases of successful M&A transactions the quality of CG and managers activity plays an important role. In the research of Renneboog and Vansteenkiste (2019) highlight several factors of positive impact on M&A results. They include: “CEO incentives, CEO and board connections, ownership structure, method of payment, sources of financing, target financial distress, post-merger restructuring, target acquisitiveness, political economics, and governance spillovers” (Renneboog & Vansteenkiste, 2019, p. 651).

Roberts, Wallace and Moles (2016) consider several scenarios of failure such as “an inability to agree terms, overestimation of the true value of the target, a failure to realize all identified potential synergies, external change, an inability to implement change, shortcomings in the implementation and integration processes, a failure to achieve technological fit, conflicting cultures, a weak central core in the target” (Roberts, et al., 2016, pp. 15-17). Moreover, some researches discuss another potential hazard of M&A - CG failures, and show that CG quality has a statistically significant impact on the effectiveness of M&A transactions (Bedi & Vij, 2018; Vorotilova & Kazakov, 2015; Schnatterly & Capron, 2005). From this point of view, some authors discuss the influence of managerial activity as a factor of the result of M&A transactions. For example, Yi and Xiugang (2019) claim that the managerial psychological deviation “often leads to non-efficient investment decision-making practices” (Yi & Xiugang, 2019, p. 56).

Kummer & Steger (2008) suppose that the main reason for the failure of M&A is that companies set unrealistic goals for the transaction, and managers are not able to correctly assess the complexity of the transaction process. The process of implementing M&As requires careful preparation: identifying potential goals and objectives, devising an integration plan, compatibility of corporate cultures, evaluating the combination of companies property. Hence, the confidence in potential success of M&A plays a major role (Bandura, 1977). However, there is a risk of overestimation of the capabilities of the company. In this context, managers have a tendency to strive for impossible or unlikely results. This risk of managerial overconfidence may lead to the less thorough preparation and assessment of potential transaction opportunities.

1.9 The phenomenon of CEO overconfidence

Comparing to the qualified manager whose actions positively contribute to the value of the acquisition, overconfident managers may harm the M&A activities. Such managers may inadequately examine acquisition opportunities, underestimate the potential effect and result in the value-destroying transaction (Cui & Leung, 2020). Managers' overconfidence is the psychological characteristic, arising when managers overestimate their own decisions while underestimating possible risks (Gervais, Heaton & Odean, 2002). Considering the overconfidence from the M&A perspective, Malmendier and Tate (2008) state that “overconfident managers overestimate the returns they generate internally and believe outside investors undervalue their companies” (Malmendier & Tate, 2008, p. 24). The definition emphasizes the possibility of overestimation the managers' abilities to create value and capabilities to be above average level. Moore and Healy (2008) define overconfidence as situation when “individual overestimates abilities, performance, level of control, and the probability of success” (Moore & Healy, 2008, p. 507). Managers' overconfidence leads to overvaluation of financial indexes and performance of the company and underestimation of financial risks specifically. Such managers tend to prove their excellent performance by investing into deals and projects with high risk and thus jeopardizing the whole company (Yi & Xiugang, 2019). Doukas and Petmezas (2007) mention frequency as possible indicator of CEO overconfidence. Big number of M&A deals, made during the short period of time, may signal about lack of CEO's ability of adequately assessment of the risks and opportunities of the company. There could be misunderstanding between real value of the firm and its estimation by overconfident CEO, what leads to wrong conclusions and expectation of the CEO about synergy effect and profitable gains for the company as a result of frequent acquisitions. At the same time, these CEOs may not be aware of their overconfidence and sincerely think that they do everything in the interests of the company. Malmendier and Tate (2009) add that the overconfidence level increases after incentive events and contests where the CEO or a manager gets the awards like “best manager” as it gives them the illusion that he or she is a “star”. Such things lead to the lower returns of the acquisition deal. However, most studies focus on overconfidence level of the CEO of the company-acquirer, while Kose et al. (2011) pay attention to the overconfidence of the target company as well because it is also lead to the lower financial results of the transaction in long-term perspective.

Considering the psychological studies, Moore and Healy (2008) consider that the miscalculation occurs through the reassessment of people ability to predict future events. Thus, they describe three types of overconfidence: overestimation (belief that abilities of a person are better than they are really are), overplacement (belief that one person is better than others) and overprecision (belief that a person knows the truth even if this is not so). The authors develop a theory of reverse dependence between overestimation and overplacement and personal performance. The theory suggests that people, who perform worse, often overestimate themselves while whose, who perform better, in most cases underestimate their abilities and skills. Considering overplacement, the theory suggests that if a person performs better than he or she expected, that person often overplace his or her performance comparing to the others performance and vice versa.

Hilton et al. (2011) discuss another type of overconfidence: judgemental overconfidence (overestimating the precision of one's judgments), self-enhancement biases and overoptimism toward social risks. Talankova, Tokareva and Shamigerdyanova (2019) give the typology of overconfidence as the following: miscalibration (revaluation by people ability to predict future events), better-than-average effect and illusion of control.

Renneboog & Vansteenkiste (2019) mention one of the traits, related to the term of overconfidence - narcissism. Aktas et al. (2016) define this trait as “egocentricity, lack of empathy, unrelenting search for the spotlight, an overdeveloped sense of entitlement, and even contempt towards others” and measure it with the proportion of CEO's using the first-person singular and plural pronoun during the meetings (Aktas et al., 2016 p. 125). The results of their research show positive relatedness of narcissism to probability of transaction completion and negative relatedness to deal returns and duration of the takeover process.

Most studies examine overconfidence as a negative trait of CEOs, leading to the unwanted results of the M&A deal. Nevertheless, there are some authors, who think differently. For example, Kolasinski and Li (2013) find positive outcomes of the overconfidence. They say that recent trading losses of overconfident CEOs lower their acquisitiveness and increase short-run returns.

1.10 The research gap identification

Due to differences in corporate governance models and some other markets and cultural aspects, the set of parameters affecting the effectiveness of M&As varies. Consequently, the gap identified based on theoretical basic analysis is that there are no studies that would investigate the influence of the CEO's self-confidence, which is formed by several personal characteristics, on the short-term results of M&As in Russian companies. In other words, the research identifies crucial factors that influence the level of CEOs' overconfidence in the foreign markets and tests them in the Russian one. Therefore, the study reveals whether adult CEOs make more efficient transactions due to their life and work experience. Moreover, it explores whether previous experience in a similar industry is an advantage for CEOs of Russian enterprises as big Russian companies that operates in the same industry are significant players in the national market. In addition, it is examined whether previous experience in M&As is significant for determining the success of a transaction. Many sources note the great influence of the government in the Russian M&A market, therefore, this work examines whether experience in government bodies is a determining factor in the CEO's successful decisions regarding M&A transactions. Finally, in previous studies a lot of attention is paid to the study of education as a factor affecting the overconfidence of CEOs. However, due to the cultural and national characteristics of Russian managers this study finds out how the availability of business education of CEOs affects short-term transaction results.

1.11 Hypotheses generation

Based on theoretical background and previous researches, it is stated that managerial overconfidence plays an important role in the result of M&A activities. In order to identify which of CEO's characteristics lead to the overconfidence and as a result have decisive impact on short-term performance of M&A transactions, five hypotheses are defined.

In the framework of overconfidence theory, the authors argue about the impact of the age on the M&A performance (Ferris et al., 2013, Graham et al., 2013, Eduardo & Poole, 2016). While ones claim that the managerial overconfidence increases with the age and leads to effective decision-making process in term of acquisitions activity due to improving of business perception, others suppose that older CEOs are less likely to make important decisions, regarding M&A activity, and demonstrate successful M&A performance. This is reflected in the following hypothesis:

H1: The acquisition conducted by older CEO has a stronger short-term performance than the acquisition conducted by a young CEO.

Some researches state that decision-making process in term of M&A activity can be affected by the previous experience (Capron, 1999; Doukas & Petmezas, 2007; Malmendier & Tate, 2008; Levi et al., 2009; Ferris et al., 2013; Raman et al., 2013; Kilian & Schindler, 2014, Renneboog & Vansteenkiste, 2019; Cui & Leung, 2020). It includes such factors as the previous CEO's experience in M&A transactions, similarity of the sphere, whether the CEO is an expert of particular sphere, and the work relations of the CEO with the governance. Hence, the following hypotheses are generated:

H2: The acquisition conducted by a CEO with previous CEO experience in a similar industry has stronger short-term performance than the acquisition conducted by CEO without previous experience in a similar industry.

H3: The acquisitions conducted by a CEO with a work-experience in the government has stronger short-term performance than a CEO without a work experience in the government.

H4: The acquisition conducted by a CEO with at least three previous experience of M&A deals has stronger short-term performance than the acquisition conducted by a CEO without previous experience in M&A deals.

Some researches confirm a strong correlation between presence of business education and CEO overconfidence, that can lead to positive M&A short-term performance (Betrand and Schoar, 2003; Malmendier & Tate, 2008; Kilian & Schindler, 2014). Therefore, it is assumed that:

H5: The acquisitions conducted by a CEO with business education has stronger short-term performance than the acquisition conducted by a CEO without a business education.

1.12 Research goal statement

The main objective of this study is to identify and analyze the characteristics of CEOs for the short-term results of M&A deals in the Russian market. The analysis of the literature showed that corporate governance, and CEOs, in particular, play a significant role in the management of the company, as well as in the decision-making process for M&A. Based on previous studies on this topic, several hypotheses involving the most common characteristics of the CEOs are generated. These characteristics are used in this study as independent variables. Since the research is aimed at assessing the characteristics of the CEOs of the Russian companies, the analysis uses transactions implemented by Russian public companies in the period from 2012 to 2019. It is expected that in the result of the study, the particular factors that have a crucial influence on short-term M&A performance along with CEOs personal features.

2. Methodology

This chapter explains the research objective, data collection process, sample generation process, sample description, applied event study methodology, and cross-sectional regressions in order to test the defined hypotheses, and describe the dependent and independent variables. In addition, it describes sample validity and limitations.

2.1 Data sample

In modern conditions, both the world and the Russian M&A markets are experiencing significant quantitative and qualitative changes: the pace and scale of transactions are growing, and the transactions themselves cover almost all sectors of the economy. The KPMG report (2019) shows an increase in activity in the M&A market in the segment of domestic transactions as well as in the segment of deals for the purchase of Russian assets by foreign companies. In 2019 the volume of foreign investments in the Russian economy increased by 49.5% compared to 2018. Despite the number of transactions in the Russian market is growing in the period from 2012 to 2019, their value tends to decrease. Ivanov and Peredunova (2017) note that nowadays management of the companies is not possible to make long-term decisions. As a result, companies tend to participate in transactions that can provide only short-term performance. In other words, managers try to increase efficiency by applying certain short-term solutions instead of fulfilling long-term development goals. Therefore, this leads to the decrease in the volume of transactions. In addition, the last time mega-transaction of more than 10 billion dollars in the Russian market was implemented only in 2016 (KPMG report, 2019). The reason for this is instability of the country's economic development.

In order to analyze the current situation on the Russian M&A market and effect of the management of Russian companies on the short-term M&A results, a sample of observations is formed based on the following criteria:

1. The acquiring company is a public company registered in Russia, that shares are traded on the Moscow Exchange (MOEX) since the analysis of short-term results is based on changes in stock prices.

2. The acquiring company is the parent company. M&A transactions of subsidiaries are excluded since decisions on transactions by subsidiaries are made by local managers.

3. The announcement of the transaction by the company occurred from January 1, 2012 to December 31, 2019.

4. Stock prices for 130 days before and 10 days after the announcement date are available on Thomson Reuters Datastream and Investing.com.

5. The sample includes companies from various industries. However, based on Doukas and Petmezas (2007) and Kilian and Schindler (2014) studies, financial institutions such as banks, insurance companies, venture, and investment funds are excluded because they have different balance sheet structure and much greater financial leverage that has different meaning for financial enterprises than for non-financial companies.

6. Based on the research of Malmendier and Tate (2008), the sample includes only those transactions where the buyer company acquired a controlling stake of the target company, at least 51%. Since the result of such a transaction is a change of the target company's ownership, and the buyer company can mainly own, use and manage the assets of the target.

Figure 6 M&As involving Russian companies Source: RBC.ru (2020)

2.2 Time frame

For several years, the Russian M&A market has been influenced by many significant factors caused by economic and political incidents. Ivanov (2017) emphasizes that from 2013 to the present, the global market for M&A transactions is rising. According to the theory of wave development of the global M&A market, from 2003 to 2013 in the global market there was a wave, characterized by the realization of transactions within the framework of the implementation of the strategy of cross-border horizontal and vertical integration, as well as a sharp increase in integration transactions in the sectors related to construction and finance. However, since 2014, according to experts, there is a new wave, which is characterized by an increase in the number of transactions in high-tech industries and the services sector. But there is a decrease in the financial sector and the mining industry. A further increase in the share of cross-border transactions (mainly between companies from developed and developing countries) is also expected.

RBC.ru (2020) notes that in recent years enlargement is taking place in many sectors of the Russian economy, large business is beginning to spread to sectors that it has not previously been interested in. However, this does not affect the number of transactions involving Russian companies. Palnichenko, Mikheeva and Kulumbetova (2015) note that the Russian M&A market has a significant decrease in the activity of companies since 2012. Moreover, there is an impact on the Russian market and operating of the Russian companies of the currency crisis in Russia in 2014. In order to take into account the possible effect of the consequences of the crisis and the wave theory effect, this study uses transactions completed in the period from 2012 to 2019.

2.3 Variables

2.3.1 Depending variables

An analysis of previous researches shows that CAR values are used as a dependent variable to test and evaluate how various personal characteristics of the CEO and features of the board of directors influence the performance of M&A transactions. The CARs that are calculated for the event windows at 21 days and 11 days are used as a dependent variable in this study. Each event window uses CARs that correspond to the most significant value of the test statistics. Such variable is used as a dependent because it reflects the change in the stock returns of companies and the market reaction to the announcement of M&As. Consequently, on the basis of calculated CARs, it can be concluded about the short-term results of M&As and also analyze whether M&As create value or destroy it. Thus, this study presents two dependent variables: CAR21days and CAR11 days.

2.3.2 Independent variables

Based on analysis of other exploratory studies on M&A and CG topics, it can be concluded that the evaluation of the influence of independent variables proceeds with the help of the regression model. For this research, the analysis of the secondary data allows to identify several CEO characteristics that are taken as independent variables. The descriptions of the variables are presented in the table below.

Table 2

The description of the independent variables