Sitting on the Board or Sitting on the Throne?

What is it about?

In this paper we focus on mergers and acquisitions (M&As) performance and we observe that these extraordinary operations destroy acquirers’ value. We analyse 296 M&A deals concluded in Italy over the period 2000-2013. Given the Italian industrial structure of family businesses - characterized by long-term strategic horizon and where the goal of the family ownership and the non-family managers seems to be aligned – we hypothesize that the negative results of M&As are the results of boards’ overconfidence rather than an opportunistic behaviour. We argue that managers and directors involved in M&As may be particularly prone to being victims of this bias of decision-making (DM) because they have a link with almost all the factors the psychological literature has detected to foster overconfidence: the hard-easy effect, the illusion of control, the illusion of knowledge, the self-attribution bias and gender differences. We link board overconfidence to interlocking directorship (ID) and we test if highly interlocked boards destroy more value during M&As. We suggest that ID is a proxy of overconfidence at a group (board) level because it increases the illusion of knowledge and the illusion of control which are the two main psychological phenomena that psychological literature detects at the origin of overconfidence. Moreover, ID is related both to the Reputational Hypothesis and the Busyness Hypothesis which in classical finance result in contrast but may be both related to overconfidence. In fact, sitting in more boards is mirror of director’s superior quality (Fama, 1980; Fama and Jensen, 1983). So we argue that if ID is expression of public acknowledgment of director’s optimal qualities, the director itself will hail this attribution of value, increasing confidence in its own ability. Moreover, as time and cognitive resources are limited, if someone accepts more mandates, it may mean he believes to be able to manage the more busyness and the high commitment, and so he is very confident in its own ability. We notice that on average, the operations of M&As destroy value (the Average Cumulative Abnormal Returns (ACARs) for all the event windows analysed are negative and all statistically significant at the 99% level). The proxy of overconfidence we introduce, ID, is able to explain the value destruction observed in the market that follows the operations of M&As. Moreover, the variable of ID is the only overconfident variable, among those considered in our study, that has a negative impact on the CARs of acquirers’ firms. The negative relationship holds both in the short-run and in the long-run. In this paper we contribute to reinforce previous results which sustain that M&As are detrimental, and in particular we explore the Italian M&A market which has distinct features. Our study also sheds light on the relationship between ID and M&A processes that has not been extensively explored in the literature before.

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