Foreign CEOs Get More out of Acquisitions

In the European Union, acquirers' CEOs that were born outside the acquirer's domicile are more likely to engage in cross-border mergers. Why does it happen? And do these transactions generate more or less profits? Antonio Marra and Angela Pettinicchio of the Bocconi University, with Ron Shalev (Rotman School of Management, University of Toronto), raise these questions in Home Sweet Home: CEOs Buying Firms in their Home Countries - Information Asymmetry or Home Bias. The authors focus on European Union firms to determine whether the country in which the CEO was born and raised drives the preference for domestic or cross-border mergers.

"Literature on Mergers & Acquisitions shows that these transactions are not always efficient. Sometimes they are disastrous", Angela Pettinicchio says. According to data, non-domestically born CEOs are 87% more likely to engage in cross-border acquisitions. The relationship is driven by the CEOs' preference to purchase in their own country of birth. There are two alternative explanations: the acquirer's CEO may have a home bias, that is a non-rational bent towards the country of birth; or, the preference could stem from a superior knowledge of that country that allows him to mitigate information asymmetries.

"The latter seems to be the correct explanation. Acquisitions led by CEOs from the country of the target firm generate abnormal positive return in the following days compared to acquisitions led by domestically born CEOs". The performance is better when the acquisition is led by recently hired non-domestically born CEOs. They are more equipped to mitigate information asymmetries because they have more up to date information and more recent connections in their country of birth. This ability is even more relevant when the CEO is born and raised in a country where the legal enforcement and the disclosure quality are weak.

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