Does international experience influence CEOs? The effect of CEOs' international exposure on corporate policies: a study on US takeovers.

Abstract

A recent wave in economics and finance literature finds measurable managerial traits have significant empirical explanatory power for corporate financial decision-making (see.g. Malmendier et al, 2005; Bennedsen et al, 2007; Cronqvist et al, 2012; Yim, 2010). Among this limited set of studies, this paper adds complementary evidence on CEO's international measurable traits affecting firm behavior. More specifically, I test the effect of CEO internationality on cross-border activity of firms and the use of equity in financing takeovers, using a unique hand-collected data set.

The data set consist of a sample of 2764 firm-year observations and 918 mergers and acquisitions transactions, including large and listed US companies between years 1993 and 2011. In total there are 144 firms and 454 CEOs, of which 87 are foreign born and 159 have foreign work experience. I hand-collect data on CEO internationality as none of the existing databases provides the information. As the main method of the study I use firm fixed effects models since they are efficient in estimating the effect of international background on firm behavior using only variation between CEOs, and not by firms. I also address the endogeneity issues by confirming that the results hold for subsamples of acquisitions made less than 5 years after CEO appointment and with deal size, as it seems companies would be more likely to select a CEO to conduct a particular transaction in large deals to be conducted soon

I find that CEOs do matter for firms. I remark internationality created from working in foreign countries increases CEOs' propensity for cross-border acquisitiveness. The outcome persists even after controlling for CEO self-selection to cross-border acquisitive firms with several complementary methods. However, I find the effect of CEOs internationality is more significant in larger deals, and thus possibly implying CEO self-selection to conduct larger deals. I also find that companies with CEOs who have worked abroad longest are 75 per cent more likely to announce a cross-border M&A compared to peers. Besides, I also note CEOs with foreign nationality and foreign work experience shy away from equity financed takeovers, even after controlling for key other CEO and firm characteristics in fixed effects models. Moreover, it has an important economic power in my sample: The odds that a foreign born CEO announces an equity financed deal in a given year is 37 per cent smaller than that for US born CEO managing the same firm and CEOs with foreign work exposure are 44 per cent less likely to announce an equity financed deal compared to peers. This relation is strongest among those having shorter tenures abroad, and those CEOs who have experience in an environment with poor shareholder protection. All my findings are consistent across two sample sets, one using full sample of CEOs and the other using only observations in US born CEOs.