Board Characteristics, Managerial Incentives, and the Choice Between Foreign Acquisitions and International Joint Ventures

Abstract

Drawing on the agency theory, corporate governance, and international business literatures, the authors link board characteristics and managerial incentives to the choice between acquisitions and joint ventures by firms entering foreign markets. Hypothesized relationships are examined in the context of 383 acquisition and 171 joint venture entries undertaken by relatively nondiversified firms in the U.S. manufacturing sector during the period 1991 to 1999. Findings indicate that firms with boards characterized by a higher proportion of outside directors and independent leadership structures (i.e., the absence of duality) are more inclined to favor acquisitions over joint ventures in foreign market entry. Likewise, the data reveal that firms where insiders have greater equity ownership and compensation structures that are more closely linked to long-term firm performance prefer acquisitions over joint ventures. Implications of the findings along with directions for future research are discussed.

Foreign board members in Russia’s largest corporations: A special emphasis on the country’s 10 biggest firms investing abroad

“…Similarly, Lien et al [2005], aft er having analysed over 200 publicly listed companies in Taiwan, concluded that there is only limited statistical support for the impact of board characteristics upon the decision to undertake FDI. Datta et al [2009] used a dataset consisting of close to 400 acquisitions and 200 joint ventures, in the US manufacturing sector. Th eir fi ndings indicate that fi rms with boards characterised by a higher proportion of outside directors, independent leadership structures and fi rms with a separation of the Chief Executive Offi cer (CEO) and board chair positions are more inclined to favour acquisitions over joint ventures, in their foreign market entry.…”

Interlocking directorships and firm performance in highly regulated sectors: the moderating impact of board diversity

“…Accordingly, we construct the measure of CEO tenure as the number of years during which the current CEO served in this role in a given firm (e.g., Westphal and Zajac, 1995). CEO/Chairman separation is coded as a dummy variable, taking the value of 1 if the CEO and chairman roles are separated, and 0 if both roles are performed by the same individual (e.g., Datta, Musteen and Herrmann, 2009). CEO ownership is operationalised as the value of equity held by the CEO in absolute values.…”

Does Board Experience Matter? Evidence from Foreign Direct Investment

“…Differences in national culture, customer preferences, business practices, and institutional forces increase transaction costs when conducting investment abroad [12,19,20]. Furthermore, information asymmetry in foreign markets requires great efforts from executives to adjust to local market conditions, posting significant challenges in achieving strategic objectives [21,22].…”

“…In particular, although joint ventures (JVs) and acquisitions (ACs) are both characterized by the involvement of an ex-anti target/partner selection, negotiation process, and ex-post integration efforts, the two modes face challenges that are qualitatively different. Contrary to the partial equity investment as found in JVs, the full-investment of capital in ACs involves in-depth resource commitment, which causes investing firms to be more vulnerable to environmental uncertainty, thereby leading to higher venture risk [20,25]. Further, ACs assume full control, and thus require greater efforts from investing firms to overcome integration challenges, such as how to harmonize culture conflicts between acquiring and target firms, reconcile discrepancy of organizational systems, and prevent turnover of acquired human capital [24].…”

“…Our aim to fill this research void regarding the link between director experience and FDI outcome can be insightful, because foreign investment is theoretically perceived as a superior strategy to arbitrage product and capital market imperfections across countries [18]; whereas in practice it usually incurs rigorous "liability of foreignness" and results in inferior outcomes. In view of the prevalence of cross-border investments among enterprises, as well as the board's active participation in a firm's internationalization process [19,20], findings from this study can elucidate this long-standing inquiry of how to realize purported FDI benefits by highlighting the vital yet rarely explored factor: board experience. In this regard, this study represents a critical step towards a clearer understanding of the determinants of FDI performance by showing whether, with aid from director experience, a firm can perform better in this highly integrated and globalized competitive environment.…”