Abstract
We examine whether top managers' professional connections, specifically in roles as executive officers of industry associations facilitate mergers and acquisitions (MA) for their firms and reduce deal premiums as acquirers. Leadership roles in industry associations could benefit the managers' firms in reducing information asymmetry in MA bidding, fostering trust between negotiation parties, and reducing overall deal costs. Consistent with our predictions, we find that firms with professional connections are more likely to successfully complete MA deals and pay smaller acquisition premiums. In additional analyses, we find results indicating that professional connections moderate conditions in the market that are often adversarial to business dealings. Specifically, we find that the beneficial effect of professional connections on MA deals is more pronounced for firms operating in environments where social trust is lower, for firms facing higher level of government intervention, and for non-state-owned firms as compared to state-owned enterprises.
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Notes
The Chinese market is characterized by the presence of both privately held firms and state owned enterprises. The latter’s executives are appointed by the government and are usually much better connected politically than the former. Therefore, the importance of professional connections could be especially important to Chinese private firms that lack political connections.
There are also considerable variations in trust levels within China’s various regions (Zhang and Ke 2002).
The prominent Chinese sociologist Fei (1948) observed that the Chinese society is a system of networks through which each participant is connected and from which each draws support.
Therefore, even if a target firm is not a member of the industry or the association, the acquirer manager could still obtain useful information germane to the acquisition decision as long as the target is in a business related to the industry association firms.
"Special treatment" (ST) is a label used by China's stock exchanges to alert the investors of potentially high risk firms. Conditions that trigger an ST label include having had two consecutive years of losses and delisted firms that have just been relisted, among others.
In China, both state-owned enterprises and non-state-owned enterprises can be publicly traded companies. In this paper, we refer to non-state-owned enterprises as privately owned firms wherein the descriptor “private” refers to the nature of ownership rather than listing status.
Note that as a result of our screening described above, the sample of MAs includes only completed deals that met our criteria.
In contrast, only 2.6% of the acquirers' target firms have professional connections.
To the extent the gender and education levels of managers do affect the likelihood of MA activities, the exclusion principle will be violated. Larcker and Rusticus (2010) acknowledge the difficulty of finding an ideal instrumental variable in general and we acknowledge the limitations of our choice of instruments in the context of MA activities. Specially, any characteristics that firm executives possess that are correlated with their being industry association leaders could potentially be an influence in the firms’ MA activities.
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Acknowledgements
We thank the editor and two anonymous reviewers for the valuable insights and suggestions. Jingbo Luo thanks the financial support from the National Natural Science Foundation of China (Grant No.: 71762014). Weimin Wang benefits from the Richard A. Chaifetz School of Business Summer Research Grant.
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Luo, J., Wang, W. Do managers' professional connections benefit their firms in mergers and acquisitions: Chinese evidence. Rev Quant Finan Acc 60, 679–713 (2023). https://doi.org/10.1007/s11156-022-01108-1
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DOI: https://doi.org/10.1007/s11156-022-01108-1