Sticky Decisions: Anchoring and Equity Stakes in International Acquisitions

Abstract

This study proposes an anchoring perspective on international equity ownership decisions. Given the complex, uncertain nature of such decisions, we recognize the potential for heuristics such as anchoring to replace time-consuming and information-intensive analyses; specifically, top managers might draw on the recent international equity ownership decisions of others to determine how much equity stake to purchase in foreign target firms. Drawing on standard regression methods and more recently developed hedonic regression techniques, this study reveals some systematic effects of anchoring in international equity ownership decisions. Anchoring is more likely when international acquisitions occur under informational deficiencies in genuinely uncertain settings but less likely when the acquiring firms are managed by overconfident CEOs.

Keywords

anchoring heuristics international equity ownership decisions isomorphism managerial cognition overconfidence

International acquisitions account for nearly half of all worldwide mergers and acquisitions (M&As;Bloomberg, 2011). Executives must choose the level of equity ownership to buy in international target firms. This decision affects the acquiring firm’s control over its international venture and its ability to redirect the venture’s strategies (Chari & Chang, 2009; Folta, 1998; Gatignon & Anderson, 1988; Herrmann & Datta, 2006). For example, Walmart increased its equity stake in Seiyu from 64.27% to 97.77% to gain more control over this unprofitable Japanese venture. The equity ownership level also affects the firm’s resource commitments and future risk exposures (Anderson & Gatignon, 1986; Chari & Chang, 2009), which in turn affect its performance and survival in the host country (Chen & Hu, 2002; Dhanaraj & Beamish, 2004).

Scholars use several theoretical frameworks to determine which factors influence firms’ international equity ownership decisions. These frameworks, which include the transaction cost perspective (e.g., Brouthers & Brouthers, 2003; Henisz, 2000b), real options theory (e.g., Chari & Chang, 2009), information asymmetry theory (e.g., Chen & Hennart, 2004; Malhotra & Gaur, 2014), and institutional theory (e.g., Davis, Desai, & Francis, 2000; Lu, 2002), assume a rational choice paradigm. These approaches anticipate executives’ value-maximizing or value-optimizing behaviors to facilitate decisions that limit unanticipated losses while capitalizing on better conditions in foreign markets.

Although these theoretical frameworks provide useful insights, they do not systematically address the influence of managerial cognition on international equity ownership decisions (Brouthers & Hennart, 2007). This gap is surprising, because an upper echelons perspective suggests that executives’ cognition and values influence strategic decisions, organizational behavior, and outcomes (Carpenter, Geletkanycz, & Sanders, 2004; Christensen, Dhaliwal, Boivie, & Graffin, 2015; Hambrick & Mason, 1984). Ultimately, top executives make choices about international acquisitions. These choices are cognitively challenging and complex, particularly when information is scarce (Duhaime & Schwenk, 1985; Haspeslagh & Jemison, 1991; Hitt & Tyler, 1991). To overcome these challenges, decision makers often use simple rules or heuristics (Bingham & Eisenhardt, 2011; Gigerenzer & Gaissmaier, 2011).

We extend prior work on international equity ownership decisions by proposing that managers might use heuristics when deciding on the equity level in an international acquisition. In this study, we focus on one important and ubiquitous heuristic, anchoring, which refers to decision makers’ use of an initial value (i.e., anchor) for estimating (Tversky & Kahneman, 1974). Under high levels of uncertainty, people may not sufficiently adjust from the anchor, which can bias final estimates towards the anchor (Tversky & Kahneman, 1974). People selectively access information that is consistent with the anchor while ignoring information that is inconsistent (Mussweiler & Strack, 1999a). Studies show that anchors affect experts and nonexperts similarly (Northcraft & Neale, 1987; Mussweiler & Englich, 2005). People use anchors even when warned not to (Wilson, Houston, Etling, & Brekke, 1996). Additionally, incentives have not been shown to reduce anchoring (Tversky & Kahneman, 1974; Wilson et al., 1996). A large body of empirical work shows that anchoring is prevalent in many important decisions (for a review, see Furnham & Boo, 2011). Hammond, Keeney, and Raiffa (1998: 4) caution that “anchors influence the decisions not only of managers, but also of accountants and engineers, bankers and lawyers, consultants and stock analysts. No one can avoid their influence: they’re just too widespread.”

In this study, we explore anchoring behavior in international equity ownership decisions. Studies in behavioral economics and behavioral strategy emphasize that, in uncertain environments, managers often rely on cognitive frameworks that limit their search to recent information and past practices (Gavetti & Levinthal, 2000; Levinthal & March, 1993; March, 2006). Drawing on this work, we predict that executives will anchor their level of equity ownership in an international acquisition (i.e., the focal international equity ownership level) on the most recent level of equity ownership purchased by another foreign-based firm in the same target country and industry (i.e., the previous international equity ownership level). We further argue that the previous international equity ownership level will act as a stronger anchor when executives encounter high levels of uncertainty in international acquisitions. Finally, we posit that CEO overconfidence can inhibit anchoring, because CEOs tend to rely on knowledge from their own memories, simple rules, and judgments.

Given our focus on why previous equity ownership decisions influence executives’ focal decision-making process, our explanation for anchoring may seem similar to institutional isomorphism. However, anchoring and isomorphism are fundamentally different. First, anchoring relates mostly to value estimates, whereas institutional isomorphism focuses on organizational practices or structures among organizations driven by legitimacy motives (e.g., DiMaggio & Powell, 1983; Haunschild, 1993). Our study focuses on a single quantitative decision as opposed to broader organizational practices or structures.

Second, anchoring is a cognitive shortcut that can be “unintentional and nonconscious” (Wilson et al., 1996: 389). Isomorphism involves deliberate, sociological processes: Imitators initially identify legitimate or successful firms with which they may have social or relational ties (DiMaggio & Powell, 1983; Haunschild & Miner, 1997; Kostova & Roth, 2002), and they subsequently attempt to interpret and act on information embedded in practices, structures, or processes that are deemed advantageous (Lieberman & Asaba, 2006). With institutional isomorphism, the focal acquirer copes with uncertainty by applying rules of inference whereby superior acquiring firms and practices are identified as models for imitation. Anchoring does not use such rules (Bahník & Strack, 2016; Mussweiler, 2003; Mussweiler & Strack, 1999a, 2000). Our anchoring explanation in this study is not restricted to whether prior deals or prior focal acquirers are more superior or legitimate.

Third, individuals often anchor on recent or convenient information (Altman, 2004). Likewise, we propose that executives focus on the most recent international acquisition in the host market, because it is psychologically convenient. With isomorphism, executives will gain legitimacy by mimicking a pattern of prior acquisitions, not just the most recent one. In our study, we focus on the most recent international acquisition only.

Our study makes two important contributions. First, by explaining the influence of anchoring, an important judgmental heuristic, we extend prior research in the area of international acquisition ownership decisions that has relied predominantly on the rationality-optimization paradigm. We highlight that senior managers are likely to draw on heuristics, thus extending the view that managerial cognition warrants closer attention in understanding international acquisition ownership decisions. Second, we contribute to recent studies on the use and effectiveness of heuristics in management strategy (Bingham & Eisenhardt, 2011; Maitland & Sammartino, 2015; Malhotra, Zhu, & Reus, 2015) by drawing attention to the boundary conditions surrounding heuristics, particularly how some cognitive attributes, such as overconfidence, inhibit rather than enable the use of heuristics. We thus offer more nuanced insights on how heuristics influence strategic decisions.

Theory and Hypotheses

Equity Ownership in International Acquisitions

Considerable research describes why executives acquire firms, enter a joint venture, enter an alliance, or set up wholly owned subsidiaries in foreign markets (e.g., Barkema & Vermeulen, 1998; Brouthers & Hennart, 2007; Cho & Padmanabhan, 2005; Vermeulen & Barkema, 2001). Executives prefer international acquisitions over other entry modes when they need to procure advanced technologies or reputable brands, enter foreign markets quickly, improve capacity utilization, or consolidate market power (Anand & Delios, 2002; Chen, 2008; Hennart & Park, 1993). The few studies that examine managers’ equity ownership decisions in international acquisitions rely on an array of theories (Chari & Chang, 2009; Malhotra & Gaur, 2014).

The transaction cost perspective suggests that managers consider contractual hazards when choosing a high-control (i.e., majority acquisition) or low-control (i.e., licensing, alliance, or international joint venture) entry mode. Specifically, firms that are more vulnerable to acute contractual hazards (e.g., costly hold-up, opportunistic renegotiations) than political hazards (e.g., expropriation) often prefer a majority acquisition as a governance structure, because it can manage contractual hazards in a cost-effective way (Henisz, 2000b; Zhao, Luo, & Suh, 2004). The real options perspective centers on how value-maximizing firms optimally allocate their financial resources to international expansion. For example, Chari and Chang (2009) find that firms purchase partial ownership in foreign target firms to overcome their relative information disadvantages and to capitalize on real options, in the form of follow-on equity investments, when the uncertainty gets resolved. Based on an information asymmetry perspective, Chen and Hennart (2004) propose that acquirers may opt for minority acquisitions when concerned with a holdup problem by the target. In a minority acquisition, target firm managers will retain equity stake in the merged firm and thus will refrain from activities that will erode the wealth of the firm (Chen & Hennart, 2004; Chi, 1994). Other studies using geographic distance as a proxy for information asymmetry find that greater geographic distance leads to lower equity ownership in foreign target firms (Malhotra & Gaur, 2014; Ragozzino, 2009). Drawing on an institutional perspective (North, 1990; Scott, 1995), other scholars propose that the regulatory and cultural underpinnings of foreign countries define the observed pattern of entry-mode decisions. By accentuating the liability of foreignness (Zaheer, 1995), institutional differences may encourage firms to pursue legitimacy in foreign markets through imitative behaviors (DiMaggio & Powell, 1983), especially in international settings (Chan, Makino, & Isobe, 2006; Davis et al., 2000; Lu, 2002).

To extend this literature, we emphasize that the high levels of uncertainty and information asymmetry in international acquisitions impose substantial cognitive demands on top managers. Therefore, it is important to understand how heuristics and mental models shape international equity decisions.

Managerial Cognition and Heuristics

According to early behavioral economics, decision makers with incomplete knowledge use heuristics or simple rules in uncertain environments (Gigerenzer & Gaissmaier, 2011; Gigerenzer & Goldstein, 1996; Kahneman, 2011). This research draws heavily on work by Tversky and Kahneman (1974), who integrate psychological realism into standard optimization- or equilibrium-based models (Rabin, 2013). A key focus is how heuristics might lead decision makers away from accurate information processing or reasoning. Recent studies suggest that heuristics do not always cause biases (Gigerenzer & Gaissmaier, 2011). In particular, Gigerenzer and Goldstein (1996) find that heuristics economize information and support timely decisions.

Behavioral strategy scholars have extended this work by studying how heuristics in managerial decision making influence strategic decisions, organizational processes, and organizational outcomes (Hodgkinson & Healey, 2008; Kaplan, 2011; Narayanan, Zane, & Kemmerer, 2011; Priem, Walters, & Li, 2011). Managers cope with their cognitive limitations by relying on mental frameworks (Nadkarni & Barr, 2008) or “simplified knowledge structures or cognitive representations about how the business environment works” (Gary & Wood, 2011: 569). These mental models can simplify spatial, temporal, and causal relationships (Gavetti & Levinthal, 2000; Weick, 1979). They also help filter information from the external environment so that managers can focus on relevant information for strategic decisions (Huff, 1982; Narayanan et al., 2011). In particular, managers might limit their search to recent information and nearby locations when searching for cues in uncertain environments (Gavetti & Levinthal, 2000; Levinthal, 1997; Levinthal & March, 1993).

These mental models are likely influenced by executives’ demographics or personal characteristics (Narayanan et al., 2011). A central tenet of the upper echelons perspective is that top managers typically must interpret incomplete or ambiguous information when making strategic decisions (Hambrick & Mason, 1984). However, their mental models tend to alter their perception of reality and thereby affect their strategic choices (Hambrick & Mason, 1984; Narayanan et al., 2011). Using the observable demographic attributes of top managers as proxies for their mental models, previous research shows that various demographic characteristics (e.g., age, tenure, educational background, experience, political orientation) shape how they perceive their businesses and environments and thus affect their strategic decisions (e.g., Carpenter et al., 2004; Christensen et al., 2015).

Behavioral strategy research also recognizes a role for managerial cognition in the acquisition process. Hitt and Tyler (1991: 329) evoke an upper echelons perspective to describe the process for evaluating a target firm:

Executives of firms considering acquisitions should carefully analyze both their external environment and internal operations and use the resulting analysis to evaluate potential acquisitions … given the limits of human information processing capabilities, a top executive evaluating different potential acquisitions can be expected to simplify the decision process by limiting the criteria considered and by weighing some criteria more heavily than others.

Garbuio, King, and Lovallo (2011) find that managers are inclined to acquire resources with which they are most familiar, independent of their relative economic or strategic significance. Maitland and Sammartino (2015) examine how executives at an Australian mining company make judgments when undertaking an acquisition in a politically hazardous African country. They propose that the executives analyzed and adapted to this environment by constructing small-world representations based on their understanding of the complex relationships among different actors and events. Thus, different heuristics can be used to identify which information to look for (“discovery heuristics”) and how to interpret it (“evaluation heuristics”). These insights are consistent with previous research on the link between cognition and search heuristics (Gavetti & Levinthal, 2000; Haley & Stumpf, 1989). In the case of international acquisitions, we propose that executives may be inclined to decide on the level of international equity ownership by engaging in anchoring.

Anchoring Theory

Anchoring constitutes a particularly interesting heuristic that can be traced to Tversky and Kahneman’s (1974) landmark article on prospect theory. Decision makers become overly influenced by some initial value, which biases their final decision in that direction (Tversky & Kahneman, 1974). A growing body of research, predominantly in experimental psychology, has investigated anchoring effects across many decisions (for a review, see Furnham & Boo, 2011). The mechanism can be explained according to a selectivity accessibility model (Mussweiler, 2003; Mussweiler & Strack, 1999a, 2000). People begin their estimation decisions with some initial value in mind or some reference to what the response or decision could be, which is the anchor. In their evaluation process, they search selectively for information, in their memory or through an external search that is consistent with this anchor, which is the selectivity phase. When they evaluate the gathered information to make their final decision, the anchor-consistent information is more readily accessible; hence, their final decision is close to their initial anchor. This is the accessibility phase.

Prior work on anchoring was performed in controlled laboratory settings, which exposed participants to anchors that were implausible or irrelevant to the focal decision. However, recent studies indicate that anchoring also happens when anchors fall within an acceptable or plausible range (Mussweiler & Englich, 2005; Mussweiler & Strack, 1999b). Plausible anchors come more easily to mind, and it requires considerable effort to adjust away from them (Epley & Giolvich, 2006). For example, Northcraft and Neale (1987) find that real estate agents estimating the price of a house anchor their decision on its list price, even though those same agents previously had denied that list prices would influence their final estimation. Similarly, Shapira and Shaver (2014) find that managers undertaking project investment decisions anchor their decisions on average profit measures, which shifted their choices away from the optimal, profit-maximizing investments. Beggs and Graddy (2009) show that a previous sale price (anchor) of a painting, rather than its objectively estimated value, determines its subsequent sale price at auctions. As with heuristics in general, despite the prevalence of anchoring in many decision domains, a systematic investigation in real business settings is a recent phenomenon (Beggs & Graddy, 2009).

Previous and Focal International Acquisition Equity Levels

International acquisitions occur under high levels of information asymmetry, increasing the difficulty that executives face in collecting valuable and reliable information about the target firm (Ragozzino & Reuer, 2011; Reuer, Shenkar, & Ragozzino, 2004; Seth, Song, & Pettit, 2000). Executives may resort to simplified practices and a due diligence process that is not sufficiently informative or analytically rigorous (Haspeslagh & Jemison, 1991). Preliminary evidence suggests that anchoring occurs in M&As. For example, Baker, Pan, and Wurgler (2012) show that managers’ decisions about acquisition premiums depend significantly on target firms’ peak stock prices in the previous 12 months. Premiums may increase for firms whose stock price spiked even once in the previous 12 months. Similarly, Malhotra et al. (2015) show that acquiring firms engage in anchoring when making premium decisions. Consistent with these findings and with evidence that common business anchors include past events and decisions (Hammond et al., 1998), we argue that previous international acquisition equity decisions in the local market influence international acquisition equity ownership decisions.

The literature on managerial cognition argues that managers’ cognitive frameworks shape their attention to specific, salient information in the environment (Marcel, Barr, & Duhaime, 2011). In particular, Thomas, Sussman, and Henderson (2001) find that cognitive frameworks lead managers to focus predominantly on past information. According to Gavetti and Levinthal (2000), past practices often act as templates for managers’ future decisions. For example, managers set future sales expectations by using previous years’ sales figures (Hammond et al., 1998). Thus, a preceding international deal’s equity stake likely serves as an anchor point for decision makers.

A previous international acquisition equity ownership level offers a meaningful anchor for two reasons. First, it is likely that acquiring firm executives have been exposed to previous international ownership equity decisions, because they perform transaction analyses to help make strategic decisions (Rosenbaum & Pearl, 2009). As two directors of UBS investment banks who have handled many large acquisition deals note, preceding transactional analyses serve to “anchor valuations” (Rosenbaum & Pearl, 2009: 84). Precedent analyses involve evaluations of previous acquisitions in the industry to gauge firm quality and local market conditions. Because the local market’s previous international acquisition is the most recent international acquisition, it also should be more easily recalled and offer the most current information. Therefore, preceding international acquisition equity levels should be highly salient in executives’ cognitive frameworks, which further increases the likelihood that executives notice and attend to this number in their evaluation of the focal deal.

Second, foreign acquirers are more likely to anchor on previous international deals by other foreign acquirers, which is in line with the influence of reference groups on decision making. The managerial cognition literature emphasizes how reference groups shape managerial strategy (Fiegenbaum & Thomas, 1995; Narayanan et al., 2011). That is, managers use reference groups to access information, set aspiration levels, and select reference points (e.g., Epley, 2004; Massini, Lewin, & Greve, 2005). People are often drawn to information from reference groups and use it to structure their perceptual fields (Sherif, 1953) and set strategies (Fiegenbaum & Thomas, 1995). Moreover, managerial attention increasingly focuses on information from reference groups because of its relevance. For example, international acquirers face regulations, market entry barriers, and social contexts that differ from those of domestic acquirers. International decision makers thus associate with other international acquirers as reference groups in similar situations. These combined features should induce acquiring firm executives to use the previous equity ownership level of other international acquirers as an anchor when making their own international acquisition equity ownership-level decisions.

Hypothesis 1: The local market’s previous international acquisition equity ownership level acts as an anchor for the focal international acquisition equity ownership level.

Uncertainty and Anchoring Behavior

Anchoring effects depend on the level of uncertainty that surrounds the decision in question (Mussweiler & Strack, 2000). We consider two settings in which acquiring firm executives likely confront nontrivial informational deficiencies and learning challenges. In the first setting, a foreign target firm might operate in a different industry than the acquiring firm. Industry relatedness between the acquiring and target firms is an important determinant of uncertainty and information asymmetry in international deals (Chari & Chang, 2009; Malhotra & Gaur, 2014; Malhotra, Sivakumar, & Zhu, 2011). When foreign target firms operate in unrelated industries, acquiring firm executives confront unfamiliar circumstances and informational barriers, such as limited practical knowledge about the unrelated industry’s shared norms, procedures, and standards (Huff, 1982). By pursuing foreign target firms in unrelated industries, acquiring firms widen the gap between the information and experience they need to evaluate and execute an international acquisition and the knowledge and experience they already have accumulated in their own industry. This enlarged gap could accentuate information asymmetry problems, such that executives have relatively little information about the foreign target firm’s true potential or the future prospects for its industry (Chari & Chang, 2009; Chen & Hennart, 2004; Malhotra & Gaur, 2014; Reuer & Koza, 2000). These information deficiencies thus suggest that acquiring firms may find it difficult and costly to conduct information-intensive analyses, in terms of executive time, financial resources, and cognitive resources. Anchoring is particularly likely to emerge in this setting.

In the second setting, executives might face informational deficiencies when they pursue foreign target firms in unstable or highly volatile countries. Multinational enterprises risk being exploited when they invest in countries in which governments are not legally or politically restrained (Henisz, 2000a). In response to such political hazards, executives might employ mitigating governance structures, such as a majority acquisition (Henisz, 2000b). The inherently unstable nature of a politically hazardous environment prevents long-range planning and forecasting exercises that are standard business practices in institutionally developed environments, thus creating a role for heuristics. As Maitland and Sammartino (2015) show, senior executives attempt to cope with uncertainty in politically unstable environments by forming perceptions about complex structural relationships among different actors and events and their potential influence on those relationships. We propose that the same informational challenges could lead acquiring firm executives to exhibit anchoring behavior. Considering both channels, we predict the following:

Hypothesis 2: The previous international acquisition equity ownership level in the local market acts as a strong anchor for the focal international acquisition equity ownership level when (a) the foreign target firm operates in an unrelated industry and (b) the acquiring firm enters less politically stable environments.

Overconfidence and Anchoring Behavior

In keeping with an upper echelons perspective (Hambrick & Mason, 1984), previous research has linked aggressive bidding behavior by acquirers to hubris or overconfidence in their senior executives (Hayward & Hambrick, 1997; Roll, 1986; Seth et al., 2000). Overconfidence in senior executives may be explained in terms of differences in their self-assessments. For example, based on the concept of core self-evaluation, overconfident CEOs are likely to exhibit higher levels of self-esteem, self-efficacy, internal locus of control, and/or emotional stability than other CEOs (Hiller & Hambrick, 2005). On a whole, this implies that overconfident CEOs might have higher levels of core self-evaluation than other CEOs. The potentially enhanced levels of core self-evaluation in overconfident CEOs may also be manifested in their tendencies to judge themselves to be better than average (Malmendier & Tate, 2005). In addition, they might overestimate their abilities and prospects for success on particularly difficult tasks (Cain, Moore, & Haran, 2015; Windschitl, Kruger, & Simms, 2003). When undertaking tasks as difficult as international acquisition deals, CEOs may exhibit overconfidence because of the tendency to overestimate their ability or chance of success. We also expect overconfident CEOs to favor the accuracy of their memories, simple rules, and judgments over others’ (cf. Dunning, Griffin, Milojkovic, & Ross, 1990; Talarico & Rubin, 2003; Wells & Olson, 2003). Thus, when faced with international equity ownership decisions, they are predisposed to activate and act on knowledge from their own memories, simple rules, and judgments; hence, the previous levels of equity purchased in foreign target firms by others is less likely to emerge as an anchor among overconfident CEOs. Therefore, we propose the following:

Hypothesis 3: The previous international acquisition equity ownership level in the local market acts as a weak anchor for the focal international acquisition equity ownership level when the acquiring firm’s CEO is overconfident.

Methods

Sample

We collected information on completed international acquisition deals between 1990 and 2009 from the Securities Data Corporation Platinum database. In line with prior studies, we omitted transaction values of less than $1 million (e.g., Fuller, Netter, & Stegemoller, 2002; Moeller, Schlingemann, & Stulz, 2005). We then merged firm-level information from the Compustat Global database and country-level information from the World Development Indicator database. We collected institutional measures from the World Bank. For our empirical analysis, we also collected firm-level information for the most recent preceding international acquisitions in the host country and target industry (anchor). After we merged all variables and removed missing values, the final sample of observations with complete data included 4,491 deals. The acquirers’ sample includes observations from 50 countries and covers 55 industries (using two-digit standard industrial classification [SIC] codes). The median deal value was US$37 million.

Dependent and Independent Variables

We determined the ownership acquired in the focal international acquisition from the Securities Data Corporation. This continuous variable ranges from 0.1% to 100% and is similar to measures used in other studies (Chari & Chang, 2009; Delios & Henisz, 2000; Malhotra & Gaur, 2014). The key explanatory variable is ownership acquired in the international acquisition preceding the focal deal in the host country and target industry (by four-digit SIC code). We calculated the ownership variable for the previous international acquisition by using a method similar to that used to measure ownership of the focal international acquisition.

In line with prior studies (Malhotra & Gaur, 2014; Malhotra et al., 2011; Reuer et al., 2004), we assessed deals in unrelated industries with a dummy variable that equals 1 if the acquiring firm and the target firm did not share the same four-digit SIC code and zero otherwise. To measure political stability, we used the Worldwide Governance Indicators developed by the World Bank, which range from -2.5 (high political risk) to 2.5 (low political risk).

Following Malmendier and Tate (2008) and Campbell et al. (2011), we created a CEO overconfidence dummy variable equal to 1 if the acquiring firm’s CEO has more than 67% “in-the-money” stock options (i.e., the stock price exceeds the exercise price by more than 67%) and 0 otherwise.¹ When stock options are significantly in the money, a CEO who holds on to the option contract is considered to be highly confident about future stock performance. This measure has been found to affect various managerial and financial decisions (e.g., Deshmukh, Goel, & Howe, 2013; Galasso & Simcoe, 2011; Hirshleifer, Low, & Teoh, 2012; Malmendier & Tate, 2005, 2008). We gathered the CEO option information from the ExecutiveComp database. Because CEO compensation information is available for U.S. firms only, we tested Hypothesis 3 on a subsample of U.S. international acquisitions.

Control Variables

We controlled for several plausible explanations for acquiring firms’ foreign equity ownership structure. First, the transaction cost perspective contends that firms acquire greater ownership levels to counter opportunistic partners (Brouthers & Hennart, 2007; Chang & Rosenzweig, 2001). Opportunism increases with high asset specificity and when investments occur in uncertain environments. In line with other studies (e.g., Delios & Beamish, 1999; Mani, Antia, & Rindfleisch, 2007), we used R&D intensity to measure asset specificity, which is the R&D expense divided by the total revenue of the acquiring firm in the latest fiscal year-end before the focal acquisition. To account for environmental uncertainty, researchers commonly use the cultural distance between the home and host country (Erramilli & Rao, 1993; Luo, 2001; Padmanabhan & Cho, 1996). We accordingly adopted Hofstede’s (1980) four cultural dimensions (individualism, uncertainty avoidance, power distance, and masculinity), but we followed Kogut and Singh’s (1988) method and combined them into one composite variable.

Second, parent firms’ international experience provides them with capabilities that should influence their foreign equity ownership decisions (Delios & Beamish, 1999; Delios & Henisz, 2000). We controlled for three types of international experience—number of international acquisitions, international joint ventures, and international alliances—entered into by the acquiring firms in the 5 years before the focal acquisition.

Third, researchers have used real options to explain acquiring firms’ foreign equity ownership structure (Chari & Chang, 2009; Folta, 1998). We included several variables to control for real options. We measured target industry uncertainty by differentiating high-tech from non–high-tech industries. Using Loughran and Ritter’s (2000) definition of high-tech industries, our high-tech variable equals 1 if the target industry falls in the high-tech industry group and 0 otherwise. We also followed Beckman, Haunschild, and Phillips (2004) and used the average stock price volatility as another measure of industry uncertainty. Interest rates and foreign exchange rates also affect real options, because they determine the present value of the exercise price. We calculated the country-level interest rate variable by collecting the interest rate of the target country for each sample year from the World Development Indicator database. To calculate the effect of the foreign exchange rate, we noted the exchange rate of both acquiring and target countries in each sample year, then calculated the percentage change in the relative exchange rate between them from the beginning to the end of that year. A positive value means that the acquiring country’s currency appreciated against the target country’s currency in that year. In the regression model, we included the prior year’s interest rate and exchange rate measures.²

Fourth, scholars have adopted institutional theory to explain foreign ownership structure. We controlled for a bandwagon effect that could encourage a certain entry mode strategy (Henisz & Delios, 2001; Xia, Tan, & Tan, 2008). We used a measure similar to Xia et al.’s (2008) and calculated the average foreign equity acquired in the host country industry during the year before the year of the focal deal. In addition to signaling any bandwagon effect, this variable controls for a general institutional effect on foreign ownership levels, including different regulatory restrictions on foreign ownership structures across countries and industries. An M&A wave in the host country also could cause a bandwagon effect. To control for this market wave effect, we include elapsed time, which equals the number of days between the focal acquisition and the previous acquisition in the target country and industry. We also counted the number of international acquisitions in the target country and industry in the past 12 months. Many acquisitions in a short period signal a peak in an M&A wave, so we controlled for this market sentiment effect.

Fifth, specific to international acquisitions, we controlled for the difficulty of evaluating target firms, which might explain the foreign equity structure of acquiring firms (Chari & Chang, 2009; Chen & Hennart, 2004). Large transactions are more complex and involve more costly due diligence than smaller transactions; therefore, we used transaction size to proxy for valuation difficulty (Chari & Chang, 2009). We also controlled for private versus public target firms. Private firms are not required to disclose information, and fewer analysts follow them, which increases the difficulty of evaluating them.

In addition to these theoretical explanations, we controlled for important transaction characteristics, such as tender offers, friendly versus hostile acquisitions, and payment method (stock payment = 1, cash or mixed payment = 0). Finally, we noted the target-country GDP growth rate, because rapidly growing countries provide more growth opportunities to multinational firms and attract more foreign direct investment (Xia et al., 2008).

Analytical Approach

We used a conventional regression method to test our hypotheses. The dependent variable (foreign ownership level) is bounded between 0.1% and 100%, so we used a Tobit regression method that addresses censored data, similar to prior equity ownership studies (Chari & Chang, 2009; Delios & Henisz, 2000; Malhotra & Gaur, 2014). Our sample covered multiple countries and industries, so we also included acquirer-country and industry dummy variables in the models. We controlled for year-specific variations in foreign ownership levels by incorporating year dummies from 1990 to 2009 in the regression model. Finally, in line with similar studies (Chari & Chang, 2009; Folta & Miller, 2002; Malhotra & Gaur, 2014), we calculated clustered standard errors to account for multiple international acquisitions by the same firm.

Results

The total value of international acquisitions in our sample was US$2.37 trillion, an economically significant value and a good representation of worldwide international acquisition activity. Table 1 contains the descriptive statistics and correlations. The average ownership acquired in an international acquisition deal was approximately 71.7%. All correlation coefficients were less than .5, and the variance inflation factors in our models were below 2, so multicollinearity is not a concern in the regression models.

Table 1

Correlation and Descriptive Statistics

No.	Variables	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21	22	23	24	25	26	27	28
1	Focal equity level	1.00
2	Previous equity level	0.25	1.00
3	Unrelated industry	−0.09	0.03	1.00
4	Political stability	0.13	0.11	−0.01	1.00
5	R&D intensity	0.08	0.11	−0.06	0.05	1.00
6	Industry stock volatility	0.08	0.07	0.01	0.00	0.13	1.00
7	Cultural distance	−0.23	−0.18	−0.01	−0.46	−0.07	−0.03	1.00
8	International acquisition exp.	−0.19	−0.04	−0.03	−0.13	−0.08	0.00	0.25	1.00
9	International JV exp.	−0.26	−0.10	0.08	0.00	0.08	0.02	0.06	0.26	1.00
10	International alliance exp.	−0.23	−0.02	0.09	0.05	0.34	0.07	0.06	0.29	0.47	1.00
11	High-tech target industry	0.08	0.19	0.08	0.00	0.42	0.33	0.00	−0.10	0.08	0.28	1.00
12	Target country interest rate	−0.13	−0.07	−0.02	−0.21	−0.06	0.00	0.19	0.07	0.01	0.02	−0.05	1.00
13	Exchange rate	−0.08	−0.09	−0.06	−0.15	−0.02	0.00	0.14	0.11	0.17	0.10	−0.09	0.13	1.00
14	Average foreign ownership	0.29	0.21	0.03	0.22	0.11	0.00	−0.31	−0.19	−0.08	−0.11	0.07	−0.13	−0.06	1.00
15	Elapsed time	0.15	0.00	0.15	−0.04	−0.07	0.00	0.05	−0.13	−0.08	−0.13	−0.11	0.02	0.05	0.08	1.00
16	Target industry intl. acq.	0.02	0.03	−0.19	0.13	−0.01	0.01	−0.18	0.06	0.02	0.07	0.00	−0.01	−0.04	−0.03	−0.46	1.00
17	Transaction value	0.15	−0.05	−0.03	0.04	−0.12	−0.07	−0.06	0.07	−0.06	0.02	−0.13	−0.05	−0.05	0.02	−0.04	0.17	1.00
18	Private target	0.16	0.13	0.06	−0.15	0.21	0.08	−0.02	−0.10	−0.09	−0.02	0.24	−0.01	−0.07	0.08	0.01	0.00	−0.14	1.00
19	Tender offer	0.28	0.07	−0.02	0.14	−0.10	0.00	−0.12	−0.01	−0.11	−0.10	−0.08	−0.02	−0.03	0.11	0.10	0.02	0.15	−0.28	1.00
20	Friendly acquisitions	0.21	0.05	−0.02	0.08	0.04	0.08	−0.09	−0.11	0.01	0.08	0.06	−0.04	0.03	−0.01	0.06	0.10	0.04	0.12	0.03	1.00
21	Stock payment	0.02	−0.09	−0.09	0.06	−0.05	−0.01	−0.07	−0.03	0.00	−0.04	−0.06	0.00	0.02	−0.10	−0.07	0.09	0.05	−0.04	0.07	0.03	1.00
22	Target GDP growth	−0.09	−0.07	−0.01	−0.29	−0.03	0.02	0.25	0.05	0.05	−0.01	−0.01	−0.19	−0.19	−0.09	−0.07	0.06	0.02	0.05	−0.06	−0.06	−0.01	1.00
23	CEO overconfidence	0.01	0.02	0.09	0.07	−0.02	−0.01	−0.15	0.03	−0.01	−0.01	−0.10	0.02	0.00	0.05	−0.02	0.06	0.03	−0.07	0.11	−0.06	−0.01	−0.05	1.00
24	CEO tenure	0.02	−0.05	0.06	0.04	−0.07	0.03	−0.10	−0.05	−0.04	−0.06	−0.06	−0.02	0.04	0.08	0.06	−0.05	0.03	−0.07	0.12	−0.09	0.05	−0.07	0.08	1.00
25	CEO duality	−0.01	−0.02	0.19	−0.04	−0.14	−0.02	0.10	0.10	−0.15	−0.03	−0.05	−0.14	−0.19	0.01	0.07	0.02	0.13	−0.03	−0.01	−0.06	0.04	0.05	−0.01	0.12	1.00
26	CEO ownership	0.01	0.05	−0.07	0.07	−0.09	0.11	−0.01	0.09	−0.01	0.11	−0.02	0.03	0.02	0.01	0.01	−0.04	0.02	−0.02	0.05	−0.02	−0.03	−0.07	−0.10	0.18	−0.11	1.00
27	Independent board	−0.03	0.04	−0.05	−0.03	0.01	−0.05	−0.08	0.03	−0.06	−0.13	−0.05	−0.04	−0.05	−0.01	0.04	−0.04	−0.05	−0.02	−0.03	0.03	−0.01	0.00	−0.03	−0.01	−0.03	−0.08	1.00
28	Board size	−0.02	−0.08	0.08	−0.04	−0.11	0.01	0.03	0.02	0.00	0.02	−0.07	0.01	0.07	−0.02	−0.01	0.05	0.15	−0.04	0.04	0.01	−0.01	0.00	0.03	−0.05	0.07	0.00	−0.66	1.00
	M	0.72	0.67	0.61	0.56	0.05	0.59	1.06	0.91	0.21	0.36	0.36	0.06	0.00	69.93	4.83	2.81	338.24	0.25	0.19	0.88	0.45	0.04	0.38	6.72	0.45	21.92	0.59	14.56
	SD	0.37	0.37	0.49	0.71	0.07	0.38	1.20	0.84	0.45	0.66	0.48	0.11	0.08	25.40	2.05	4.61	990.29	0.44	0.39	0.32	6.09	0.03	0.49	6.16	0.50	54.37	0.17	7.04

Note: n = 4,491; correlations greater than 0.03 are significant at the p = .05 level. R&D = research and development; exp. = experience; JV = joint venture; intl. = international; acq. = acquisitions; GDP = gross domestic product; CEO = chief operating officer.

Table 2 contains the Tobit regression results. Model 1 includes the control variables only, and Model 2 adds the key explanatory variable. In Hypothesis 1, we predicted a positive relationship between the focal equity level and the local market’s previous international acquisition equity level. As Model 2 in Table 2 shows, the regression coefficient for the previous equity level (anchor) was significantly positive (p < .01), which supports Hypothesis 1. A 1 SD change in the previous equity value affects the focal ownership acquired by about 3.2%, which translates to $35.2 million for an average target firm in our sample (valued at approximately $1.1 billion). We also tested for anchoring using a hedonic regression method, as reported in the Supplementary Analyses section below.

Table 2

Tobit Models for Anchoring Effect

Dependent Variable	(1)	(2)	(3)	(4)	(5)	(6)
Focal Acquisition Ownership Acquired	Model	Model	Model	Model	Model	Model
Unrelated Industry × Previous Equity Level			.07***		.07***
Unrelated Industry × Previous Equity Level			(.01)		(.01)
Target Country Political Stability × Previous Equity Level				−.02**	−.02**
Target Country Political Stability × Previous Equity Level				(.01)	(.01)
CEO Overconfidence × Previous Equity Level						−.00**
CEO Overconfidence × Previous Equity Level						(.00)
Previous equity level		.09***	.04***	.10***	.05***	.17***
		(.01)	(.01)	(.01)	(.01)	(.04)
Industry unrelatedness	−.14***	−.14***	−.18***	−.14***	−.18***	−.17***
	(.00)	(.00)	(.01)	(.00)	(.01)	(.03)
Target country political stability	.01***	.01**	.01***	.02***	.02***	.00
	(.00)	(.00)	(.00)	(.01)	(.01)	(.02)
R&D intensity	.12***	.12***	.13***	.12***	.13***	.13
	(.04)	(.04)	(.04)	(.04)	(.04)	(.22)
Industry stock volatility	.01	.01	.01	.01	.01	.04
	(.01)	(.01)	(.01)	(.01)	(.01)	(.03)
Cultural distance	−.02***	−.02***	−.02***	−.02***	−.02***	−.02
	(.00)	(.00)	(.00)	(.00)	(.00)	(.01)
Intl. acq. exp.	.01***	.01***	.01***	.01***	.01***	.02
	(.00)	(.00)	(.00)	(.00)	(.00)	(.02)
Intl. JV exp.	−.05***	−.04***	−.04***	−.04***	−.04***	−.05
	(.01)	(.01)	(.01)	(.01)	(.01)	(.04)
Intl. alliance exp.	−.02**	−.02**	−.02**	−.02**	−.02**	−.10***
	(.01)	(.01)	(.01)	(.01)	(.01)	(.03)
High tech industry	.01	.01	.01	.01	.01	−.01
	(.01)	(.01)	(.01)	(.01)	(.01)	(.04)
Target country interest rate	.00	.01	.01	.01	.02	−.11
	(.02)	(.02)	(.02)	(.02)	(.02)	(.09)
Exchange rate	−.01	−.01	−.01	−.01	−.01	.07
	(.02)	(.02)	(.02)	(.02)	(.02)	(.15)
Average foreign ownership	.00***	.00***	.00***	.00***	.00***	.00**
	(.00)	(.00)	(.00)	(.00)	(.00)	(.00)
Elapsed time	.01***	.01***	.01***	.01***	.01***	.02***
	(.01)	(.00)	(.00)	(.00)	(.01)	(.01)
Target industry international acq.	.00	.00*	.00*	.00*	.00*	.00
	(.00)	(.00)	(.00)	(.00)	(.00)	(.00)
Transaction value	.00***	.00***	.00***	.00***	.00***	.00***
	(.00)	(.00)	(.00)	(.00)	(.00)	(.00)
Private target	.02***	.02***	.02***	.02***	.02***	.10***
	(.00)	(.00)	(.00)	(.00)	(.00)	(.03)
Tender offer	.45***	.45***	.45***	.45***	.45***	.42***
	(.01)	(.01)	(.01)	(.01)	(.01)	(.04)
Friendly acquisition	.16***	.16***	.16***	.16***	.16***	.13***
	(.01)	(.01)	(.01)	(.01)	(.01)	(.04)
Stock payment	.00***	.00***	.00***	.00***	.00***	.00***
	(.00)	(.00)	(.00)	(.00)	(.00)	(.00)
Target GDP growth	−.28***	−.22***	−.20***	−.21***	−.19**	−.03
	(.08)	(.08)	(.08)	(.08)	(.08)	(.44)
Inverse mill’s ratio	−3.40***	−3.36***	−3.36***	−3.35***	−3.34***	−3.64***
	(.04)	(.04)	(.04)	(.04)	(.04)	(.32)
CEO overconfidence						.10**
						(.05)
CEO tenure						−.00
						(.00)
CEO duality						.07**
						(.03)
CEO ownership						.00
						(.00)
Independent board						−.17
						(.11)
Board size						.00
						(.00)
CEO past acquisition experience						.00
CEO past acquisition experience						(.00)
Intercept	.60***	.57***	.60***	.56***	.60***	.70***
	(.00)	(.02)	(.02)	(.02)	(.02)	(.170)
Year, industry, and country fixed effect	Yes	Yes	Yes	Yes	Yes	Yes
Observations	4,491	4,491	4,491	4,491	4,491	536
Chi-square	2,707.91***	2,766.1***	2,775.52***	2,767.19***	2,777.1***	463.19***

Note: Robust standard errors clustered on acquiring firms are reported. R&D = research and development; intl. = international; acq. = acquisitions; exp. = experience; JV = joint venture; GDP = gross domestic product; CEO = chief operating officer.

p < .10.

p < .05.

***

p < .01.

Furthermore, Hypothesis 2a predicted a stronger relationship between the previous and focal international acquisition equity levels if the acquisition occurred in a different industry. According to Model 3, the regression coefficient for the interaction term between an unrelated industry and equity level was significantly positive (p < .01), which supports Hypothesis 2a. Model 4 further shows that the interaction effect between a target country’s political stability and previous equity level was significantly negative (p < .05), which supports Hypothesis 2b, such that the anchoring effect was stronger in less politically stable target countries.³ For Hypothesis 3, about overconfident CEOs, we ran our analyses on the subsample of U.S. international acquisitions. In Model 6 of Table 2, we controlled for additional CEO and board-level variables and uncovered a significantly negative coefficient for the interaction effect between CEO overconfidence and the previous international acquisition equity level (p < .05), which supports Hypothesis 3.

To explain the interaction effects and their economic significance, we followed Aiken and West (1991) and Dawson (2014) and used standardized regression coefficients to plot the two-way interaction graphs. More specifically, we used 1 SD below or above the sample mean value to define the high or low value of previous equity level. We plotted the changes in the predicted value of focal acquisition ownership acquired for low to high values of previous equity levels across different moderators. Figure 1 shows the moderating impact of industry unrelatedness. We found that a change in the previous equity level from low to high (i.e., from −1 SD to +1 SD) increases the focal acquisition ownership acquired by 8% (from 71% to 79%) for related industry acquisitions and by 25% (from 38% to 63%) for unrelated industry acquisitions. Prior equity level has a stronger impact (more than triple) on focal equity level in unrelated industry acquisitions, further supporting Hypothesis 2a.

Figure 1

Effect of Related Industry on the Relationship Between Previous and Focal Equity Stake

Figure 2 shows the moderating impact of political stability in the target country. The figure suggests that a change in the previous equity level from low to high increases the focal acquisition ownership acquired by 15% (from 67% to 82%) for acquisitions in politically stable countries and by 25% (i.e., from 55% to 80%) for acquisitions in politically unstable countries. Prior equity level has a stronger impact (almost 1.67 times) on focal equity level in acquisitions in politically unstable countries, further supporting Hypothesis 2b.

Figure 2

Effect of Political Stability on the Relationship Between Previous and Focal Equity Stake

Finally, Figure 3 shows the moderating impact of CEO overconfidence. We found that a change in the previous equity level from low to high increases the focal acquisition ownership acquired by 4% (from 92% to 96%) for overconfident CEOs and by 33% (from 64% to 97%) for non-overconfident CEOs. This is more than an eightfold increase, further supporting Hypothesis 3.

Figure 3

Effect of Overconfident CEOs on the Relationship Between Previous and Focal Equity Stake

Supplementary Analyses

Our main results using Tobit regressions support our hypotheses. However, the positive correlation between the previous and the focal international equity ownership levels may also be because previous deals vicariously provide foreign acquirers with relevant insights, such as the quality of target firms in a given industry. There is no direct measure for vicarious learning, but this omitted variable could bias our inferences (Reeb, Sakakibara, & Mahmood, 2012). Therefore, we used an identification strategy to separate this vicarious influence from anchoring behavior.

Accordingly, we adopted an accepted methodology from the economics literature, developed by Genesove and Mayer (2001) and Beggs and Graddy (2009) and based on a hedonic regression approach. Specifically, we identified the key determinants of the international equity ownership decision (i.e., the previously described control variables). We then regressed the international equity ownership level of both the focal and previous international acquisition deals on these control variables. (To perform this regression, we also collected data for the control variables that related to the previous deal.) With this information, we predicted values for both the focal and previous international equity ownership levels, using a first-step hedonic regression model,

R_{t} = X_{t} β_{t},

where $R_{t}$ is the predicted focal international equity ownership level, a function of the time t observable characteristics $X_{t}$ (i.e., control variables to explain the focal deal ownership), and

R_{t - 1} = X_{t - 1} β_{t - 1},

where $R_{t - 1}$ is the predicted previous international equity ownership level, a function of the preceding deal’s observable characteristics $X_{t - 1}$ (i.e., control variables to explain the previous deal ownership).

Then, we entered these predicted values in a second-stage estimation:

Y_{t} = η \cdot R_{t} + θ \cdot (Y_{t - 1} - R_{t - 1}) + δ \cdot (Y_{t - 1} - R_{t}) + ε_{t},

where $Y_{t}$ is the actual focal international equity ownership level purchased by a foreign-based acquirer in a given target country and industry, $Y_{t - 1}$ is the actual previous international equity ownership level purchased by another foreign-based acquirer in the same target country and industry, and $ε_{t}$ is the error term. In equation 3, $η$ captures the effect of the predicted focal international equity ownership level ( $R_{t}$ ) on the actual focal international equity ownership level; $Y_{t - 1} - R_{t - 1}$ captures the deviation of the previous international equity ownership level from the past prediction of what that level should be; $θ$ captures the effect of the stable, but unobserved or hard-to-measure characteristics of M&A deals in a given foreign country and industry.⁴

The variable $Y_{t - 1} - R_{t}$ is our main focus, and the coefficient $δ$ captures the anchoring effect we intend to estimate. That is, $Y_{t - 1} - R_{t}$ captures the deviation of the previous international equity ownership level from the current prediction of what the actual focal international equity ownership level should be. If foreign-based acquiring firms engage in anchoring, we expect that their decision to purchase a certain level of equity ownership in target firms in a given foreign country and industry will be strongly influenced by the previous equity ownership level purchased by other foreign-based acquirers in the same target country and industry. This level should be systematically different from what we objectively expect the focal international equity ownership level to be. Our baseline “no anchoring effect” null hypothesis is consistent with $δ$ = 0. Intuitively, this hypothesis implies that the previous international equity ownership level does not systematically deviate from our most informed guess of what the actual focal international equity ownership level should be.⁵ Therefore, it has no significant effect on the focal international equity ownership level when compared with a level that is justified by a fundamental analysis (predictive model). Contrary to the baseline hypothesis, if $δ$ is statistically significant and positive, acquirers engage in anchoring when making international equity ownership decisions. The previous international equity ownership levels not only systematically deviate from reasonable expectations of what the acquirer’s focal international equity ownership levels should be but also exert significant, potentially unwarranted influences on the acquirer’s actual international equity ownership decisions.

Models 1 and 2 in Table 3 estimate the hedonic regressions for the previous acquisition in the target industry (the anchor) and the focal acquisition in the target industry, respectively.

Table 3

Hedonic Regression Models

Variables	Previous Deal Hedonic Model	Focal Deal Hedonic Model
R&D intensity	.51***	.18**
	(.11)	(.07)
Cultural distance	−.02***	−.02***
	(.01)	(.01)
Intl. acq. exp.	−.00	−.01**
	(.01)	(.01)
Intl. JV exp.	−.09***	−.06***
	(.02)	(.01)
Intl. alliance exp.	−.06***	−.05***
	(.02)	(.01)
Industry relatedness	.02	.05***
	(.01)	(.01)
High-tech target industry	−.00	.01
	(.02)	(.01)
Target country interest rate	−.07	−.01
	(.07)	(.06)
Exchange rate	.07	.03
	(.05)	(.05)
Average foreign ownership	.00***	.00***
	(.00)	(.00)
Elapsed time	.01***	.02***
	(.00)	(.00)
Target industry intl. acq.	.00	−.00
	(.00)	(.00)
Institutional distance	−.01	−.01
	(.01)	(.01)
Transaction value	.00***	.00***
	(.00)	(.00)
Private target	.07***	.06***
	(.01)	(.01)
Tender offer	.20***	.24***
	(.02)	(.01)
Friendly acquisition	.19***	.20***
	(.02)	(.01)
Stock payment	.00	.00
	(.00)	(.00)
Target GDP growth	.08	−.15
	(.24)	(.21)
Intercept	.59	.46
	(.40)	(.35)
Year, industry, and country fixed effect	Yes	Yes
Observations	2,862	4,491
R-square	.29	.32

Note: Standard errors are clustered on acquiring firms. R&D = research and development; intl. = international; acq. = acquisitions; exp. = experience; JV = joint venture; GDP = gross domestic product.

p < .05.

***

p < .01.

Using the predicted values for both the focal and previous international equity ownership levels, we estimated the anchoring regression model in Table 4. To assess the comparable size of the regression coefficients, we standardized all the variables. As Table 4 shows, the coefficient of the predicted focal international equity level ( $η$ in equation 3) has a significantly positive effect on the actual focal international equity level, so our control model is a good predictor of the international acquisition equity ownership level. The regression coefficient for the deviation of the previous international equity ownership level from its predicted level also is positive and significant ( $θ$ in equation 3); hence, the relatively stable but unobservable or hard-to-measure characteristics of preceding international deals affect the focal international equity ownership decisions.

Table 4

Anchoring Regression Models

Step 2 Anchoring Regression (Tobit Model)	Model 1
Focal predicted equity level $(η)$	.61***
	(.02)
Anchoring effect (preceding – predicted equity acquired) $(δ)$	.13***
	(.02)
Vicarious learning $(θ)$	.05***
	(.02)
Constant	.22***
	(.05)
Year, industry, and country fixed effect	Yes
Observations	2,862
Model χ²	1,239.85***

Note: Standard errors are clustered on acquiring firms. The following model was estimated in the above regression:

$Y_{t} = η \cdot R_{t} + θ \cdot (Y_{t - 1} - R_{t - 1}) + δ \cdot (Y_{t - 1} - R_{t}) + ε_{t} .$

Other sensitivity analyses: The results are robust to various sampling variations. First, our results are robust after removing U.K. and U.S. acquirers, which accounted for 34% of the 2,862 international acquisitions in our sample. Second, our results are robust after removing international acquisitions whose transaction values were less than $50 million. Third, our results are robust after excluding acquisitions in regulated industries, such as the financial industry or utilities. Finally, our results are robust after we removed any entries for which the focal and preceding international acquisitions were too close (100 days or less)—this ensures that our results are not due to clustering pattern of M&A transactions.

***

p < .01.

The coefficient for the anchoring effect ( $δ$ in equation 3) is significantly positive (p < .01), and the standardized regression coefficient for this anchoring effect (.13) is twice that for the relevant information (.05). In terms of the economic significance of the anchoring effect, a 1 SD difference between the market’s previous international equity ownership level and the predicted focal international equity ownership level causes the anchor (i.e., the previous international equity ownership level) to pull the actual focal international equity ownership level to itself by nearly 13.3% of the standard deviation of ownership acquired in the focal acquisition. The standard deviation of the focal international equity ownership level is approximately 37%, so the effect of anchoring is approximately 4.9%. In our sample, the average market capitalization of the target firms was approximately US$1.1 billion. Anchoring would affect the average transaction value of an international acquisition by US$54 million. Our results also remained robust to other variations, as summarized in the footnote to Table 4.

Tests for Alternative Explanation

One alternative explanation for our results could be institutional isomorphism (DiMaggio & Powell, 1983; Lieberman & Asaba, 2006), in which acquiring firms imitate the equity stakes previously purchased by others to enhance their performance or bolster their legitimacy in the local market. Deliberative and sociological processes underscore institutional isomorphism. We expect managers who engage in mimetic behavior to search for firms or practices worth imitating. Organizations can bolster their survivability in uncertain markets by mimicking policies or practices that are perceived as legitimate. To separate our anchoring perspective from this institutional isomorphism perspective, we investigated whether anchoring effects persist, even when acquisition behavior falls short of legitimacy, and are thus potentially disadvantageous to an imitator.

Specifically, we considered hostile takeovers. When bidding firms make hostile offers, they circumvent top management and directly approach the shareholders. Hostile takeovers usually are a last resort (Gaughan, 2011). They spark resistance from top management (Gaughan, 2011; Schneper & Guillén, 2004) and workers (Schneper & Guillén, 2004). In international acquisitions, top managers of foreign target firms might lobby the host government to intervene. For example, during Mittal Steel’s hostile bid for France’s Arcelor, public opposition spread to then-President Jacques Chirac. Thus, by virtue of their unwelcome nature, hostile offers are unlikely to attract imitators. If anchoring effects capture legitimacy-seeking mimetic behavior, they should not arise in the case of hostile offers.

To test this, we ran our analyses on a subsample of international acquisitions in which the previous international acquisition in the local market was a hostile offer. We considered two measures, unfriendly deals and tender offers, which we collected from the Securities Data Corporation Platinum database. Most hostile acquisitions occur through tender offers (Browne & Rosengren, 1987; Gaughan, 2011). According to Models 1 and 2 in Table 5, a significantly positive relationship exists between previous and focal international acquisition equity levels for prior tender offers (p < .01) and unfriendly deals (p < .05). Thus, an anchoring effect is present even when the previous acquisition was hostile.

Table 5

Tests for Alternative Explanations

Dependent Variable	1	2	3	4	5
Focal Acquisition Ownership Acquired	Tender Offers	Unfriendly Deals	Unsuccessful Deals	Focal and Previous Acquirers From Different Countries	Previous Equity Level Exceeds Average Industry Deviation
Previous equity level	0.09***	0.04**	0.17***	0.06***	0.09***
Previous equity level	(0.01)	(0.02)	(0.03)	(0.01)	(0.01)
Control variables
Industry unrelatedness	−0.14***	−0.21***	−0.09***	−0.15***	−0.16***
Industry unrelatedness	(0.00)	(0.01)	(0.01)	(0.00)	(0.01)
Target country political stability	0.01**	0.01	0.01	0.01**	0.01*
Target country political stability	(0.00)	(0.01)	(0.01)	(0.00)	(0.01)
R&D intensity	0.14***	0.18	0.15*	0.14***	0.02
R&D intensity	(0.04)	(0.16)	(0.09)	(0.04)	(0.07)
Industry stock volatility	0.01	−0.01	0.03	0.01	0.02**
Industry stock volatility	(0.01)	(0.01)	(0.02)	(0.01)	(0.01)
Cultural distance	−0.02***	−0.03***	−0.02***	−0.02***	−0.02***
Cultural distance	(0.00)	(0.00)	(0.01)	(0.00)	(0.00)
Intl. acq. exp.	0.01***	0.02***	0.01	0.01***	0.02***
Intl. acq. exp.	(0.00)	(0.01)	(0.01)	(0.00)	(0.00)
Intl. JV exp.	−0.04***	−0.04***	−0.01	−0.03***	−0.04***
Intl. JV exp.	(0.01)	(0.01)	(0.04)	(0.01)	(0.01)
Intl. alliance exp.	−0.02**	−0.04***	−0.03*	−0.02***	−0.02**
Intl. alliance exp.	(0.01)	(0.01)	(0.02)	(0.01)	(0.01)
High-tech target industry	0.01	−0.00	−0.00	−0.01**	0.02*
High-tech target industry	(0.01)	(0.01)	(0.01)	(0.01)	(0.01)
Target country interest rate	−0.01	−0.23***	−0.23**	0.01	0.09***
Target country interest rate	(0.02)	(0.03)	(0.10)	(0.03)	(0.03)
Exchange rate	−0.01	0.10***	−0.04	−0.01	−0.06***
Exchange rate	(0.02)	(0.03)	(0.04)	(0.02)	(0.02)
Average foreign ownership	0.00***	0.00***	0.00***	0.00***	0.00***
Average foreign ownership	(0.00)	(0.00)	(0.00)	(0.00)	(0.00)
Elapsed time	0.01***	0.02***	0.03***	0.01***	0.02***
Elapsed time	(0.00)	(0.00)	(0.00)	(0.00)	(0.00)
Target industry international acq.	0.00	0.00	0.00*	−0.00	0.00***
Target industry international acq.	(0.00)	(0.00)	(0.00)	(0.00)	(0.00)
Transaction value	0.00***	0.00***	0.00***	0.00***	0.00***
Transaction value	(0.00)	(0.00)	(0.00)	(0.00)	(0.00)
Private target	0.01***	0.06***	0.07***	0.02***	0.02***
Private target	(0.00)	(0.01)	(0.01)	(0.00)	(0.01)
Tender offer	0.45***	0.48***	0.43***	0.47***	0.48***
Tender offer	(0.01)	(0.02)	(0.02)	(0.01)	(0.01)
Friendly acquisition	0.16***	0.13***	0.09***	0.17***	0.17***
Friendly acquisition	(0.01)	(0.01)	(0.02)	(0.01)	(0.01)
Stock payment	0.00***	0.00***	−0.00***	0.00***	0.00***
	(0.00)	(0.00)	(0.00)	(0.00)	(0.00)
Target GDP growth	−0.17**	−0.21	0.82**	−0.32***	0.05
	(0.08)	(0.17)	(0.34)	(0.08)	(0.11)
Inverse mill’s ratio	−3.34***	−3.61***	−2.89***	−3.52***	−3.51***
	(0.05)	(0.08)	(0.16)	(0.04)	(0.06)
Intercept	0.53***	0.77***	0.78***	0.59***	0.54***
	(0.02)	(0.04)	(0.07)	(0.02)	(0.03)
Year, industry, and country fixed effect	Yes	Yes	Yes	Yes	Yes
Observations	3,920	586	472	3,123	2,124
Chi-square	2,424.68***	528.52***	369.71***	1,967.11***	1,383.44***

p < .10.

p < .05.

***

p < .01.

Similarly, acquiring firms that seek to imitate legitimate behavior should be reluctant to imitate other firms that make unsuccessful international acquisition bids, because such failure might emanate from the bidder’s departure from business norms and values. Furthermore, considering the potential decline in social support for a failed foreign bidder in local markets (Ahlstrom & Bruton, 2001; Bianchi & Ostale, 2006), other aspiring bidders may avoid practices that mimic those of the failed party. In line with institutional isomorphic reasoning, if a prior international acquisition bid was not perceived as successful, the focal acquirer has little reason to mimic its expressed equity ownership interest. To assess whether the previous international acquisition was successful, we used a short-term event study methodology and collected the daily stock price of the prior acquiring firm around the deal announcement period from DataStream. We also collected the corresponding stock market index for the same period. Similar to Brown and Warner (1985), we used standard market-adjusted models to calculate daily abnormal stock returns around the acquisition announcement date for each acquiring firm. That is, we focused on the event window t − 1 to t + 1 (one day before and one day after the announcement date) and calculated the daily abnormal return as follows:

A R_{j, t} = R_{j, t} - R_{m, t},

where $A R_{j, t}$ was the daily abnormal return for firm j on day t, $R_{j, t}$ was firm j’s daily stock return on day t, and $R_{m, t}$ represented the daily return of the local stock market index on day t. We then added daily abnormal returns to measure the cumulative abnormal return (CAR) for acquiring firm j in the 3-day period (–1, +1) surrounding the acquisition announcement:

C A R_{j} = \sum_{t = - 1}^{+ 1} A R_{j, t} .

An announced international acquisition deal is successful, from the perspective of stock market investors and shareholders, if the CAR measure is positive, and it is unsuccessful if the CAR measure is negative. Model 3 in Table 5 shows the results for our analyses of a sample of unsuccessful international acquisitions. We still found a significantly positive relationship between the previous and focal international acquisition equity levels (p < .01). That is, an anchoring effect persists even when the previous acquisition was perceived as unsuccessful.

In line with the sociological foundation of the institutional isomorphism perspective, social or business networks constitute potential channels through which firms may externally acquire knowledge (DiMaggio & Powell, 1983). Imitators with social or relational ties to leading firms could have an advantage in terms of a better understanding of why and how leaders achieve legitimacy or superior performance (Haunschild, 1993; Haunschild & Beckman, 1998; Kostova & Roth, 2002). For example, prior research suggests that mimetic acquisition behavior is especially prevalent among acquirers with network ties in the form of board interlocks (Haunschild, 1993; Haunschild & Beckman, 1998). We tested whether our results hold if prior and focal foreign acquirers are not part of a board interlock. As acquirers from different countries are unlikely to be in the same interlocked board, we selected a subsample where both the focal and prior foreign acquirers are from different home countries. The results (Model 4 in Table 5) show a significantly positive relationship between the previous and the focal international acquisition equity levels (p < .01).

Finally, it can be argued that legitimacy-seeking foreign firms would not mimic the preceding acquisition equity level if it diverted from the industry norm. We measured the industry norm as the average level of equity purchased in foreign target firms of a given country and industry. If industry players tolerate deviations in equity purchases up to the average deviation from the industry norm, then the institutional isomorphism perspective suggests that legitimacy-seeking foreign acquirers should not imitate other foreign acquirers whose prior level of ownership of foreign target firms in the same industry exceeds the average deviation from the industry norm. Model 5 in Table 5 shows that, for a subsample of deals where the previous equity level exceeded the average deviation, the relationship between prior and focal international equity levels is significantly positive (p < .01). Overall, our critical tests show that institutional isomorphism is not a likely explanation for our results.

Discussion

We applied a behavioral framework to explain how top managers make international equity ownership decisions. We focused on the anchoring heuristic and offer systematic evidence that a local market’s previous international equity ownership level acts as an anchor in such decisions. Furthermore, the tendency of top managers to engage in anchoring is particularly strong when informational deficiencies are compounded by high levels of uncertainty, such as when firms acquire foreign target firms in unrelated industries and when such target firms operate in politically unstable environments. By conducting a comprehensive regression analysis that incorporates the recently developed hedonic approach, we showed that anchoring leads acquiring firms to purchase equity stakes in foreign target firms at levels that are systematically different from what they would have been if these firms had relied instead on information from objective or systematic analyses. However, acquiring firms engage less in anchoring when they have an overconfident CEO.

Our study makes several contributions to different streams of research. First, we add to extant literature on equity-based foreign entry mode decisions (Brouthers & Hennart, 2007; Canabal & White, 2008). Previous research has focused on rational choice or normative perspectives without systematically addressing the role of top managers’ cognition. Drawing on theoretical insights from behavioral economics and behavioral strategy, we propose an anchoring theory of international equity ownership decisions. We document new systematic evidence that supports this anchoring mechanism; specifically, we show that top managers, such as CEOs, could unconsciously draw on others’ most recent equity stake purchases in foreign target firms when making their international equity ownership decisions. By providing evidence of the influence of cognitively limited CEOs on equity-based foreign entry mode decisions, we go beyond conventional determinants, such as transaction costs (Zhao et al., 2004), informational asymmetry and uncertainty (Chari & Chang, 2009; Chen & Hennart, 2004; Chi, 1994), or the institutional environment (e.g., Davis et al., 2000; Lu, 2002). Furthermore, the results extend acquisition-related research on anchoring, in the context of premium decisions (Malhotra et al., 2015), by providing a deeper understanding of how managerial cognition influences the anchoring mechanism under uncertainty. Our study thus reinforces the point that managerial cognition and heuristics warrant closer attention in integrated theoretical frameworks (Gavetti, 2012; Levinthal, 2011; Powell, Lovallo, & Fox, 2011).

Second, by providing robust empirical support for a behavioral interpretation of top managers’ international equity ownership decisions, our study both verifies and complements insights from case studies on the behavioral underpinnings of corporate strategy. For example, in a case study of six international entrepreneurial firms, Bingham and Eisenhardt (2011) link the development of firm-level capabilities to the refinement of heuristics that managers learn in unpredictable markets. Another study that similarly focuses on an international acquisition setting documents a single-company case study that shows how the interplay of senior executive expertise and higher order heuristics produce rich, sophisticated, small-world representations of unstable and complex social environments (Maitland & Sammartino, 2015). We do not demonstrate explicitly how a given firm-level anchoring practice arises from the anchoring practices of individual decision makers, but we recommend caution to avoid overstating the challenge of translating the latter into the former (Eggers & Kaplan, 2013). Highly specialized senior executives oftentimes evaluate, execute, and integrate acquisition deals (Rovit & Lemire, 2003). Given the potential for acquisition teams to share a core set of beliefs or mental models that enable low-level managers to appreciate a certain approach to acquisition deals (Tyler & Gnyawali, 2009), a single senior executive or small group of unified senior executives could have considerable latitude over the firm’s anchoring practices.

Case studies offer important insights into the nature and consequences of heuristics; however, they are subject to concerns about the extent to which the findings can be generalized. Because we used a large sample for our quantitative analysis, there are relatively few concerns about the external validity of our key results with respect to the use of the anchoring heuristic. In particular, we found that uncertainty, whether caused by international acquisitions in unrelated industries or politically unstable environments, encourages senior executives to unintentionally resort to heuristics, such as anchoring. This finding supports similar findings by Maitland and Sammartino (2015).

Beyond verifying previous case evidence, our study provides a basis for evaluating the suitability and efficacy of heuristics in a particular business context. Anchoring can distort an acquiring firm’s international equity ownership decisions if a substantial mismatch arises between the structural characteristics of the past international acquisition deal (i.e., the anchor) and the current deal. In turn, there is considerable room for improvement in analyses of comparable international deals and in the selection and adjustment of anchors, such as the role of judgment expertise (Maitland & Sammartino, 2015). Acquiring firm CEOs should try to attain the international acquisition expertise needed to identify anchors and adjust for differences appropriately (Gary, Wood, & Pillinger, 2012; Lovallo, Clarke, & Camerer, 2012).

The presence of overconfident CEOs in acquiring firms is associated with weaker anchoring effects. The potential for cognitive attributes to inhibit rather than enable the use of heuristics is an interesting observation, because behavioral theorists usually appeal to cognitive factors to justify the use of heuristics (Tversky & Kahneman, 1974; Simon, 1955). Observed differences in the use of heuristics and the extent of executives’ cognitive sophistication cannot be explained solely by differences in the level of expertise. Overconfidence among senior executives also must be considered.

These findings have important implications for managers and practitioners. Due to the constraints top managers face in collecting reliable information and making analytically rigorous evaluations of foreign target firms (Hitt & Tyler, 1991), they may gravitate toward anchors when making investment decisions (Garbuio et al., 2011), especially if those top managers want to acquire a firm immediately to gain access to key resources (Ransbotham & Mitra, 2010). However, senior executives engaged in anchoring may overemphasize information about previous international equity ownership structures and ignore other important, deal-specific information. Therefore, they should carefully consider the influence of anchoring on their international acquisition decisions. Although it is difficult to break from anchoring in practice (Wilson et al., 1996), forming more diverse acquisition teams and establishing various checks in the decision-making process may help reduce an overreliance on heuristics.

Our study has several limitations that offer opportunities for research. We found that a previous international acquisition influences a focal international deal’s equity ownership level but did not provide detailed insights into how previous equity-level decisions influence decision makers. Also, although our results and additional tests showed strong support for our anchoring theory, we acknowledge that we cannot explicitly determine whether managers’ decisions are deliberate or unintentional. Further research could provide richer insights through a qualitative design that includes interviews with key executives, although such qualitative research may be difficult, because acquisition decisions usually are made in secret.

We focused on how higher levels of uncertainty can increase anchoring. However, other factors, such as the level of acquisition experience among acquiring firm executives, also can influence the use of heuristics. Anchoring studies have found mixed results on the effects of experience (Furnham & Boo, 2011). Future research could explore whether managers with more acquisition experience use anchors less because they are less constrained by uncertainty, or whether they anchor on an internal anchor (originating from their previous acquisitions) rather than an external anchor.

Finally, the hedonic regression technique explicitly recognizes that previous equity-stake purchases may contain useful information about relatively stable but unobserved international M&A deal characteristics. Top managers may intentionally learn about such characteristics by thoughtfully incorporating the previous equity stakes purchased by others in their own decision-making process. By offering a way to disentangle this external learning opportunity from a psychologically driven one, such as anchoring, the hedonic regression approach lends itself to a potentially broad set of applications in strategic management research. For example, it could be specifically applied in organizational learning research. Building on the longstanding view that people’s performance improves as they accumulate experience (e.g., Argote, Beckman, & Epple, 1990), researchers have increasingly focused on the possibility of learning from the experience of others (e.g., Shaver, Mitchell, & Yeung, 1997). The hedonic regression approach could clarify this theoretical insight, because it facilitates a direct test of whether such an external learning process is as thoughtful and meaningful as suggested or merely an unintentional outcome of psychological processes.

Conclusion

When considering how much equity to purchase in foreign target firms, conventional approaches suggest that managers objectively evaluate the risks and costs of their international equity ownership decisions under uncertainty and informational deficiencies. Conventional, rational-choice frameworks offer some important theoretical and practical insights, but there is more to the story. We emphasize the formidable challenges that acute information deficiencies pose for time-constrained and cognitively constrained executives, and we explore less cognitively sophisticated approaches to international equity ownership decisions. In particular, we show that top managers, such as CEOs (and particularly less self-confident ones), engage in anchoring when confronted with such decisions. Whereas anchoring practices may help executives to cope with uncertainty under time pressure, some anchors may be less appropriate, because they are based on deals that could differ fundamentally from the focal international deal. Therefore, it remains important to find effective ways to assess and manage the drawbacks associated with anchoring.

Footnotes

Acknowledgements

This article was accepted under the editorship of Patrick M. Wright. We thank the Associate Editor, Dr. Devi R. Gnyawali, and two anonymous reviewers for their valuable and developmental feedback. We also thank Dr. Glen R. Whyte for his suggestions on our earlier drafts. This research was supported by the Social Sciences and Humanities Research Council of Canada through their Insight Grants program.

Notes

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