Cultural diversity in the executive suite and

international acquisition performance

Bram Fiselier

S2226669

Supervisor: Dr. V. Purice

Januari 2017

Master’s thesis

University of Groningen

Faculty of Economics and Business

International Financial Management

MSc International Financial Management

Faculty of Economics and Business

University of Groningen

MSc Business and Economics

Department of Business Studies

Uppsala University

Abstract

Many researchers tried to determine the performance effects of cross-border mergers and

acquisitions, and what triggers this performance. This thesis contributes to this field of literature

by investigating the role of cultural diversity within the executive board on acquisition

performance. Where most studies focus on the announcement effects of cross-border acquisitions,

this thesis focuses on the long-term effects, trying to capture the role of the executive board in the

integration process after an acquisition becomes effective. Using a multivariate clustered

regression on a sample of 120 cross-border acquisitions conducted by European firms between

2007 and 2012, this thesis investigates the influence of certain variables related to culture on long-

term international acquisition performance. The results show that acquiring firms perform well in

the long run after an international acquisition. No evidence was found for the impeding effect of

cultural distance on this performance. The results show a positive effect of cultural board diversity

on long-term acquisition performance. This effect increases as cultural distance increases.

Furthermore, having executives from the target country on the board is beneficial as cultural

distance increases. Evidence is also found for a negative effect of board age on long-term

performance. Limited evidence is found for a positive effect of openness of the target firm’s

country to the world economy on this performance.

Keywords: International acquisitions, cultural distance, cultural diversity, executive boards, post-

acquisition integration

1. Introduction ............................................................................................................................... 1

2. Theory ........................................................................................................................................ 3

2.1 Mergers and acquisitions .................................................................................................................... 3

Acquisition performance ....................................................................................................................... 5

2.2 International acquisitions .................................................................................................................... 5

Opportunities ........................................................................................................................................ 5

Challenges ............................................................................................................................................. 6

International acquisition performance ................................................................................................. 9

2.3 Cultural board diversity .................................................................................................................... 10

Positive effects .................................................................................................................................... 11

Negative effects ................................................................................................................................... 12

3. Data and Methodology ........................................................................................................... 13

3.1 Data Collection ................................................................................................................................. 13

3.2 Variables ........................................................................................................................................... 14

Independent variables ......................................................................................................................... 14

Control Variables ................................................................................................................................ 15

3.2 Methodology ..................................................................................................................................... 19

4. Results ...................................................................................................................................... 22

4.1 Multivariate clustered regression ...................................................................................................... 22

5. Discussion................................................................................................................................. 26

5.1 Cultural distance ............................................................................................................................... 26

5.2 Cultural board diversity .................................................................................................................... 28

Cultural board diversity and cultural distance ................................................................................... 29

5.3 Executive board members from target country ................................................................................. 29

6. Conclusion ............................................................................................................................... 30

6.1 Summary ........................................................................................................................................... 30

6.2 Implications for practice ................................................................................................................... 31

6.3 Limitations ........................................................................................................................................ 31

Table of contents

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1. Introduction

The number of mergers and acquisitions grew heavily over the last couple of decades. The

majority of this rise is attributable to the growth in domestic acquisitions. The importance of cross-

border acquisitions, however, is increasing. The share of cross-border acquisitions in the number

of total acquisitions grew from 23% in 1997 to 45% in 2007. The value of all cross-border mergers

and acquisition in 2014 combined was $3.4 trillion (Raice, 2015). To put this in perspective, only

five countries worldwide, the United States, China, Japan, and Germany, had a GDP higher than

the combined value of all worldwide conducted international mergers and acquisitions.

Mergers and acquisitions attracted much attention from scholars in the previous two

decades. Previous research tried to identify the effects of mergers and acquisitions on firm

performance. The results of these studies vary. Some studies report positive performance effects

of mergers and acquisitions on firm performance (Healy et al., 1992; Wright et al., 2001), but most

researchers found value destroying effects (King et al., 2004; Agrawal et al., 1992). However, the

case of international acquisitions seems to be different. Multiple scholars found positive

performance effects of these acquisitions (Goergen and Renneboog, 2004; Chakrabarti et al., 2009;

Gubbi et al., 2010). However, also in this case, some studies presented value-destroying effects

(Datta and Puia, 1995). Thus, although it seems that cross-border acquisitions perform better than

domestic ones, scholars do not seem able to reach consensus on the performance effects of these

acquisitions, and what triggers this performance.

To create value in acquisitions, the combined firm should capture synergies (Larsson and

Finkelstein, 1999). The more a company is able to capture these synergies, the more value it could

create. If a company fails to capture these synergies, acquisitions will destroy value. To capture

synergies, integrating the two entities in a proper way is important (Lemieux and Banks, 2007;

Lajoux, 2006). Thus, acquisition performance not only depends on proper due-diligence in the pre-

acquisition phase but also on a sound post-acquisition strategy.

Several factors could complicate successful integration of entities. In the case of cross-

border acquisitions, differences in national culture between the acquirer and the target could be of

importance. Dealing with cultural differences is one of the challenges firms are facing in cross-

border acquisitions. Cultural differences could affect international acquisition performance in

several ways. They could increase the likelihood of conflicts between people from different

cultures (Hofstede et al., 2010), lead to unsuccessful integration due to difficulties in knowledge

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exchange (Lin and Germain, 1998), result in lower commitment and cooperation by the employees

of the acquired firm (Very et al., 1996), lead to misunderstanding about assignments due to

differences in administrative routines between cultures (Heiman et al., 2008; Heiman and

Nickerson, 2004), and lead to more day-to-day operating conflicts (Jemison and Sitkin, 1986).

Therefore, one would expect cultural differences to have an impeding effect on acquisition

performance. However, this might not be that evident. Cultural differences could provide some

opportunities as well. For example, acquiring firms in culturally distant countries could provide

the acquirer access to unique and potentially valuable capabilities (Chakrabarti et al., 2009), break

rigidities and therefore enhance innovation and learning, and lead to a higher level of

predisposition of managers in managing cultural differences (Goulet and Schweiger, 2006).

Another factor that could influence acquisition performance is board diversity. Board

diversity attracted much attention from scholars in the last decade. Diversity is “any attribute that

another person may use to detect individual differences” (Williams and O’Reilly, 1998, p.79).

Previous research on diversity primarily focused on differences in gender, age, ethnicity, tenure,

educational and functional background (Millikens and Martins, 1996; Williams and O’Reilly,

1998). This thesis focuses on the cultural backgrounds of executives. Markets worldwide seem to

get integrated more and more, and the number of firms operating internationally is growing. This

trend is also visible within boards, which are getting increasingly international (Staples, 2007).

This thesis investigates if acquiring companies benefit from cultural diversity within the executive

board in the event of an international acquisition. Focusing on executive board’s characteristics

allows for better prediction of organizational outcomes than by focusing on CEO's characteristics

only (Hambrick et al., 1996). Many other studies focused on the role of the full board of directors

instead of focusing on just the executive board. This thesis takes into consideration the executive

board only, since they are responsible for implementing strategic decisions and day to day

operations, and thus have a direct impact on post-acquisition integration, and therefore,

performance (Fama and Jensen, 1983).

Cultural diversity within the executive board could have several benefits for organizations

engaging in international acquisitions. For example, diversity results in higher absorptive capacity

(Cohen and Levinthal, 1990), which is needed for a successful integration of the entities (Reus and

Lamont, 2009), a culturally diverse board has access to a greater pool of task relevant knowledge,

skills and abilities (Rivas, 2012), more cultural knowledge available, needed for international

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success (Alon and Higgins, 2005), higher level of creativity and problem solving capabilities

(Dutton and Duncan, 1987), are less subject to the domestic myopia concept (Barkema and

Vermeulen, 1998), could generate trust among a firm’s product and geographic unit managers

(Kim and Mauborgne, 1991), and increased socio-cognitively complexity, leading to a greater

ability to cope with changing international market opportunities and handling conflicts and

paradoxes related to acquiring internationally (Murtha et al., 1998).

This thesis focuses on cultural diversity within the executive boards of acquiring

companies, and its effect on international acquisition performance. Short-term event studies are a

common way to measure acquisition performance (Datta and Puia, 1995; Li, Li and Wang, 2016).

However, by doing so, only the performance implications around the announcement date of an

acquisition are captured, which are subject to investor overreaction and do not provide insights in

the long-term performance (De Bondt and Thaler, 1985). Since this thesis tries to shed light on the

long-term effects of culturally diverse executive boards in the post-acquisition phase, this

methodology is not appropriate. Therefore, a long-term event study is conducted using the ‘buy-

and-hold abnormal return’ methodology. This methodology defines performance by measuring

long-term investor experience. A multivariate clustered regression is used to investigate the effect

of cultural board diversity, among other variables, on the long-term acquisition performance of a

sample of 120 European acquirers.

This thesis is structured as follows. Section 2 discusses related literature and provides the

hypotheses. Section 3 describes the data and methodology used. Section 4 reports the regression

outcomes. Section 5 contains the discussion. Finally, section 6 presents concluding remarks.

2. Theory

This section provides an overview of the relevant literature related to international

acquisitions and board diversity. This section will start off with an explanation on how companies

can capture value in acquisitions, followed by an overview of the opportunities and challenges in

international acquisitions. Finally, the potential role of cultural board diversity in international

acquisitions will be explained.

2.1 Mergers and acquisitions

Many people think of mergers and acquisitions as two similar phenomena. However, there

are some differences. In the case of an acquisition, one company takes a controlling ownership

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interest in another company, which means that more than fifty percent of the voting rights should

be acquired. It involves the purchase of assets or shares of the target firm by the acquiring firm,

with the target firm continuing to exist as a subsidiary of the acquirer. In the case of a merger, two

firms are combined into one firm, so one of the firms ceases to exist (DePamphilis, 2008).

Synergies

Firms can create value through acquisitions if synergies are present. If the combined

company is able to be more profitable than the individual companies before the acquisition,

synergies occur. According to Straub (2007), the value of an acquisition is equal to the value of

the combined companies after the acquisition minus the values of both companies before the

acquisition, the premium paid, and the expenses made in the acquisition process.

Haleblian et al. (2009) identified several ways in which synergies could arise. The first one

is through higher market power. The idea behind this is that having fewer firms in an industry

increases pricing power on firm-level. Therefore, it is easier for the combined firm to increase their

prices, since it is bigger. The increase in size also improves a firm’s bargaining power with its

suppliers. Larger firms can demand lower prices from their suppliers. Previous literature provides

evidence for this hypothesis (Prager, 1992; Kim and Singal, 1993). Secondly, synergies could arise

through economies of scale (McGuckin and Nguyen, 1995; Banker et al., 2003). In this case,

marginal costs decrease as production volume increases. Bigger production volumes allow

companies to use different, more cost-efficient production methods. Furthermore, firms could

reduce the number of employees by combining overlapping departments into one single

department which results in savings on salaries (Straub, 2007). Thirdly, through redeployment of

assets and competency transfers acquisitions can generate economies of scope (Capron et al., 1998;

King et al, 2008). An acquisition may enlarge a company’s product line. In this case, product

names, distribution channels, and customer bases can be used for multiple products, which could

enable firms to more easily enter new markets and save costs through bundling strategies. Finally,

synergies could arise through market discipline. This hypothesis states that acquisitions could

create value by disciplining incompetent managers (Jensen, 1986; Jensen and Ruback, 1983).

Agrawal and Walkling (1994) showed that CEOs of acquired firms are often dismissed once the

acquisition is completed.

The extent to which a company’s management is able to successfully integrate the acquired

company into their existing operations and capture possible synergies is related to their absorptive

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capacity (Reus and Lamont, 2009). Absorptive capacity is “the ability to recognize the value of

new information, assimilate it, and apply it to commercial end” (Cohen and Levinthal, 1990,

p.128). So, the higher the absorptive capacity of a company, the higher its capability to use the

information and resources obtained by an acquisition and the more successful it will be in

integrating the two separate entities. Scholars recognized the importance of a proper integration

strategy (Lemieux and Banks, 2007; Lajoux, 2006). According to them, acquisition performance

depends on a sound post-acquisition integration strategy as well, besides proper due-diligence of

the target company prior to the acquisition. If the two entities are not integrated properly, a

company will not be able to capture synergies and create value in an acquisition (Gates and Very,

2003).

Acquisition performance

Companies engage in acquisitions to capture potential synergies. Many scholars found,

however, that despite the synergy potential, acquisitions in general diminish value. Some studies

reported positive performance effects of acquisitions (Healy et al., 1992; Wright et al., 2002), but

most studies show adverse effects of acquisitions (King et al., 2004; Agrawal et al., 1992). Thus,

although acquisitions are a popular way of expanding businesses and enabling growth, it seems

that firms have difficulties reaping the benefits of these acquisitions. Therefore, many scholars

tried to find out what triggers acquisition performance. These studies, however, do not provide any

prerequisites that aid the estimation of acquisition performance (Straub, 2007). The different

conclusions of the studies on acquisition performance show that acquisitions are complex events,

involving the interaction of a vast number of variables.

2.2 International acquisitions

International acquisitions provide a different set of opportunities and challenges than

domestic acquisitions. In this subsection, the various opportunities offered in such acquisitions is

explained, followed by the challenges acquiring firms face.

Opportunities

Firstly, firms can get access to lucrative markets or expand their current product market

through international acquisitions. Entering markets in foreign countries is often difficult for

companies because of multiple entry barriers. Examples of these are regulations that discourage

foreign firms from entering the market, or the lack of relationships with suppliers and distributors

6

in foreign countries (Hitt and Pisano, 2003). Acquiring companies in these markets could help

firms overcome these barriers. In this way, international acquisitions could provide companies

access to foreign markets that are difficult to access in other ways. Entering foreign markets

provides an opportunity for firms to expand the market for their current products. This provides

economies of scale and lowers marginal costs. As a result, international acquisitions enable firms

to grow faster and enhance their profitability.

Secondly, international acquisitions are a form of geographical diversification. When firms

operate internationally, they spread their risks over multiple countries and markets, which results

in firms being less reliant on one single market. Furthermore, the fluctuating revenue flows due to

different economic conditions in various markets will be outbalanced by international

diversification.

Thirdly, international acquisitions offer companies opportunities to gain new knowledge

and capabilities (Barkema and Vermeulen, 1998; Very and Schweiger, 2001). Societal and

corporate cultures differ across countries, which offers firms opportunities to learn about new

capabilities and managerial practices from the acquired companies. For example, firms can

exchange knowledge of operational methods, know-how, and feedback regarding products and

procedures (Javidan et al., 2005). Furthermore, international acquisitions could provide firms

access to new resources. Many companies do not have all the resources necessary to implement

certain strategies, especially when it concerns entering markets in foreign countries. MNEs could

use international expansion as a springboard to acquire strategic resources and reduce their

institutional and market constraints at home and thereby, reduce the latecomer disadvantage (Luo

and Tung, 2007). In an increasingly global and competitive market, firms need unique and valuable

resources to gain a sustainable competitive advantage (Barney, 1991). By looking outside country

borders, the variety of new and valuable resources firms could use to expand their existing resource

base will be bigger. Therefore, international acquisitions could help firms to develop a unique and

hard to imitate resource base, composed of existing resources combined with foreign acquired

resources, which will give them an advantage over their competitors (Makino et al., 2002).

Challenges

Besides the opportunities international acquisitions offer, firms engaging in these type of

acquisitions also face certain challenges.

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When a company wants to acquire another company, targets have to be identified and

valued. The valuation of potential targets is a complex process in every acquisition (Hitt et al.,

2001). In international acquisitions, this process is even more complicated (Angwin, 2001).

Companies need to overcome the problems related to different accounting standards and practices

and fluctuations in the foreign exchange rates in valuing foreign targets. One of the most

challenging parts in valuing acquisition targets is assigning a value to intangible assets. This

process is complex in domestic acquisitions, but even more so in international acquisitions. For

example, understanding of the educational system in a country and skills and capabilities of the

workforce may be required in valuing intangible assets. Furthermore, a firm’s reputation should

be valued, which is harder in unfamiliar markets. Lastly, to appropriately value a company, critical

environmental conditions should be assessed. It could, for example, be useful to identify the

governmental regulations applicable to the firm (Hitt and Pisano, 2003).

Cultural differences

The most interesting challenges concerning this thesis are the challenges regarding the

differences in culture between the acquirer’s and the target’s countries. “Culture consists of the

unwritten rules of the social game. It is the collective programming of the mind that distinguishes

the members of one group or category of people from others” (Hofstede et al., 2010, p.6). Hofstede

et al. (2010) identified six dimensions of national culture. These six dimensions are individualism,

power distance, masculinity, uncertainty avoidance, long-term orientation, and indulgence.

Appendix C provides an overview of the dimensions. These dimensions can be used to calculate

the cultural distance between two countries1. The cultural distance reflects the level of cultural

differences between groups, or between countries. The higher the cultural distance between two

countries, the more these countries differ in relation to the cultural dimensions.

Several scholars recognized the importance of cultural distance matters in international

business (Hofstede et al., 2010; Trompenaars and Hampden-Turner, 1998; House et al., 2004), and

thus, in international acquisitions as well. For example, cultural differences could complicate the

integration process in international acquisitions. As mentioned before, integrating issues are an

important part of the acquisition process and could be of major importance in determining the

success or failure of an acquisition (Lemieux and Banks, 2007; Gates and Very, 2003; Lajoux,

1 The data and methodology section provides a common method of calculating this distance

8

2006). The integration problem in international acquisitions is referred to as double-layered

acculturation, the process in which a group adopts cultural characteristics of another group

(Barkema et al., 1996). Double-layered acculturation is necessary for international acquisitions

because of the different cultures represented in the acquiring and target firms. The literature

provides several ways in which these cultural differences hinder a successful integration. Firstly,

differences in languages could have disintegrative effects in international acquisitions (Piekkari et

al., 2005). Secondly, there should be a certain ‘organizational fit’ when successfully integrating

two companies. Datta (1991) showed that differences in leadership styles could result in the

unsuccessful integration of two companies. This issue is likely to be higher in international

acquisitions since leadership styles differ between cultures and countries (Van de Vliert, 2006).

Thirdly, cultural differences could hinder the exchange of knowledge, which is crucial in

successful integration, due to poor communication between managers from culturally different

countries (Lin and Germain, 1998; De Long and Fahey, 2000; Sales and Mirvis, 1984).

Besides the issues arising because of differences in culture in the integration phase of

acquisitions, some long-term post-integration issues could arise as well (Reuer and Koza, 2000).

The literature provides some examples of these issues. Firstly, tensions could arise because of

differences in culture, resulting in lower commitment and cooperation by the employees of the

acquired firm (Very et al., 1996). Secondly, different administrative routines in various cultures

result in difficulties regarding the transfer of managerial skills between companies. Thirdly, limited

understanding between culturally different parties leads to misunderstandings about assignments

(Heiman et al., 2008; Heiman and Nickerson, 2004). Fourthly, the increased likelihood of target

company executives leaving the company in international acquisitions and its impeding effect on

the learning effects, since valuable knowledge could be embedded in those executives (Li, Li and

Wang, 2016; Hofstede et al., 2010). Finally, day-to-day operating conflicts arise in the case of

many cultural differences (Jemison and Sitkin, 1986).

Thus, cultural differences seem to affect the performance of an acquisition. Another

challenge companies have to face beside coping with cultural differences is the so-called liability

of foreignness. When a corporation wants to operate outside its home country, it will face

unavoidable costs that firms operating in their home market would not (Zaheer and Mosakowski,

1997). These costs occur due to coordination difficulties, lack of knowledge about local markets,

and lack of relationships in critical networks along with cultural differences (Hitt and Pisano,

9

2003). Because of the extra costs related to operating in foreign markets, foreign firms have a

certain competitive disadvantage compared to firms operating solely their local domestic market

(Miller and Parkhe, 2002).

International acquisition performance

As mentioned in the previous section, the international aspect adds even more complexity

to the already complex event of an acquisition, providing several opportunities and challenges.

Scholars tried to shed light on the performance implications of cross-border acquisitions. For

example, Goergen and Renneboog (2004), Chakrabarti et al. (2009) and Gubbi et al. (2010) found

positive performance effects of cross-border acquisitions, while Datta and Puia (1995) found

negative effects. Some scholars also remain inconclusive (Datta et al., 1992). Thus, although it

seems that cross-border acquisitions result in better firm performance than domestic ones, scholars

do not seem able to reach consensus on the performance effects of these acquisitions.

In investigating the performance effects of cross-border acquisitions, many scholars

highlighted the effect of cultural differences on acquisition performance. Taking into account the

possible effects of cultural differences on the integration process of an international acquisition, as

presented in the previous subsection, it seems evident that differences in culture will have an

impeding effect on acquisition performance (Datta and Puia, 1995; Morosini et al., 1998).

However, this might not be as obvious as it seems. Chakrabarti et al. (2009), argued against this

negative relationship. They provided evidence for a positive effect of cultural distance, as

measured using the dimensions identified by Hofstede et al. (2010), on acquisition performance.

Firstly, they state that culturally distant acquisitions could provide acquirers with a competitive

advantage by offering them access to unique and valuable capabilities. Secondly, from an

organizational learning perspective, culturally distant acquisitions could positively affect

innovation and learning by breaking rigidities. Finally, managers are more disposed to managing

cultural differences and pay attention to national cultural factors, which improves acquisition

performance (Goulet and Schweiger, 2006).

Besides these post-deal mechanisms that could enhance international acquisition

performance, a pre-deal factor could be taken into account as well. In the case of an international

acquisition, it is more likely that the awareness of cultural differences, and the difficulties coming

with them, result in a stricter selection process. The acquiring firms will only go through with deals

10

characterized by a high cultural distance between acquirer and target country if the acquisition has

substantial economic potential (Aguilera et al., 2004; Nahata et al., 2014).

In conclusion, previous research has shown that cultural differences potentially could

provide synergies in acquisitions through capability transfer, resource sharing, and learning.

However, cultural differences result in certain challenges as well. For example, these differences

could lead to conflicts or hinder the exchange of knowledge in acquisitions. This could result in

an unsuccessful integration of the two entities. Therefore, the first hypothesis is as follows:

H1: Cultural distance has a negative effect on the acquiring firm’s performance after an

international acquisition

2.3 Cultural board diversity

Besides focusing on the cultural differences on country level and their impact on

acquisition performance, this thesis takes into account firm level variables as well. One of these

variables is the cultural diversity within the executive board of the acquiring company. Focusing

on executive board’s characteristics allows for a better prediction of organizational outcomes than

by focusing on CEO's characteristics only (Hambrick et al., 1996). Many other studies focused on

the role of the full board of directors instead of focusing on the executive board only. The reason

this thesis focuses on the executive board only is that the boards of directors are responsible for

monitoring and influencing strategy only, not for implementing these strategies or day-to-day

operations. The latter is the responsibility of the executive board (Fama and Jensen, 1983). In the

case of international acquisitions, this means the executive board is responsible for the decisions

and operations related to integrating the entities.

Diversity has been a hot topic in the literature over the past couple of decades. According

to Williams and O’Reilly (1998, p.79), diversity is “any attribute that another person may use to

detect individual differences”. Previous research on diversity primarily focused on differences in

gender, age, ethnicity, tenure, educational and functional background (Milliken and Martins, 1996;

Williams and O’Reilly, 1998). Scholars highlighted the effect of board diversity on a firm’s

strategy or performance. For example, Chen et al. (2016) showed that a gender diversity within

boards affects the acquisitive behavior of a firm, Herrmann and Datta (2005) highlighted the effect

of shorter tenure and lower age of managers on a firm’s internationalization, and Hutzchenreuter

and Horstkotte (2013) showed that firms with experienced boards perform better in acquisitions.

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Some studies also addressed international diversity within boards. Oxelheim and Randøy (2003)

showed that within European companies, the presence Anglo-Americans directors has a positive

effect on its stock price and Masulis et al. (2012) found that foreign directors could add value when

a firm is highly dependent on a foreign product market. However, there have also been studies

finding a negative (Murray, 1989) or no significant relation between board diversity and firm

performance (Michel and Hambrick, 1992). The question is, how diversity within boards could

create value for companies, especially in the case of international acquisitions. The next

subsections will provide an overview of the positive effects of cultural diversity on acquisition

performance, as well as the possible negative implications.

Positive effects

Previous literature provides a number of arguments for a positive relationship between

cultural board diversity and international acquisition performance. First off all, in a group

composed of people from different backgrounds, the available knowledge and expertise are more

differentiated. This leads to a higher absorptive capacity (Cohen and Levinthal, 1990), a greater

level of innovation and creativity in solving problems (Rivas, 2012; Dutton and Duncan, 1987),

and access to a greater pool of task-relevant knowledge, skills, and abilities. Secondly, Alon and

Higgins (2005) argue that besides a CEO’s IQ and emotional intelligence (EQ), the role of cultural

intelligence (CQ) is crucial to international success. Even the most intelligent managers are likely

to fail in international markets if they cannot understand and adapt to different cultures. This

concept could be extended to the whole executive board. The more cultural diversity within a

board, the more cultural knowledge will be available, and the higher the likelihood of international

success. Thirdly, diverse boards are less susceptible to ‘group thinking’ (Bantel and Jackson, 1989;

Jackson, 1992) and the concept of domestic myopia (Barkema and Vermeulen, 1998).

Furthermore, diverse boards are more ‘socio-cognitive’ complex (Jackson, 1992; Wiersema and

Bantel, 1992). Socio-cognitively complex boards may be better able to cope with changing

international market opportunities and handle the conflicts and paradoxes inherent to acquiring

internationally (Murtha et al., 1998). Lastly, internationally diverse boards can generate trust

among firms’ product and geographic unit managers by showing that the executive board takes

their interests into account when allocating resources (Kim and Mauborgne, 1991).

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Negative effects

Besides the positive influence of cultural board diversity, some scholars present negative

arguments as well. For example, Chen and Macmillan (1992) argued that diversity might reduce

the speed of firms in acting and responding to certain situations, which could hurt performance in

complex events such as international acquisitions, where quick responses are needed. Furthermore,

O’Reilly et al. (1989) showed that diversity could result in a lower rate of integration within

groups, which could hurt performance. Thus, while board diversity could have positive

performance implications, it might also be a double-edged sword, and result in lower performance.

Thus, although some scholars are presenting adverse effects of cultural diversity, the

arguments presented by most scholars point towards a positive effect of cultural diversity on

acquisition performance. Therefore, the second hypothesis in this thesis is as follows:

H2a: Cultural diversity within the executive board has a positive effect on the acquiring

firm’s performance after an international acquisition

As explained before, cultural differences between the acquirer and the target could increase

the complexity of an acquisition. Culturally diverse boards are more likely to possess a higher

level of creativity, knowledge, and problem-solving ability, as mentioned above. Therefore, firms

acquiring a target from a culturally distant country could reap more benefits from having a

culturally diverse board. This leads to the following hypothesis:

H2b: The effect of having a culturally diverse executive board is higher in acquisitions

characterized by a high cultural distance between acquirer and target

Besides the increased level of cultural diversity, having internationals on the board could

also help the acquiring company overcome the so-called ‘liability of foreignness’ problem. As

mentioned before, companies operating abroad face unavoidable costs that firms operating in their

home market would not (Zaheer and Mosakowski, 1997). Reasons for this is the lack of knowledge

of foreign markets, the lack of relationships in critical networks, and language difficulties.

According to Tihanyi et al. (2000), international networks are essential for firms operating

internationally. Therefore, having members from the target firm’s country on the board could

provide companies with knowledge of the target country’s market and could grant them access to

13

foreign networks. Furthermore, it could help the acquirer overcome the difficulties related to

differences in languages (Piekkari, 2005). This leads to the following hypothesis:

H3a: Having members from the target firm’s country on the executive board has a positive

effect on acquiring firm’s performance after an international acquisition

As with cultural diversity, the effect of having members from the target country on the

board is likely to be greater in the case of a high cultural distance. Reasons for this is that firms

acquiring a culturally distant target are less likely to have the necessary connections in that country.

Furthermore, difficulties due to different languages could arise. Therefore, having someone on the

board from the target country, who is likely to have connections in his home country and speaks

the language, could be more beneficial for these firms. This leads to the following hypotheses:

H3b: The effect of having members from the target firm’s country on the executive board

is higher in acquisitions characterized by a high cultural distance between acquirer and

target

3. Data and Methodology

This section describes the data and methodology used to test the hypotheses. This section

will start off with describing the data collection and sources, followed by an explanation of the

variables employed in the regressions, and lastly, an overview of the methodology is provided.

3.1 Data Collection

Acquisition data is gathered using the mergers and acquisition database Zephyr, developed

by Bureau van Dijk. The sample consists of full acquisitions only, that is, when the acquirer buys

100 percent of the target shares. By doing so, only the acquisitions where the acquirer obtains

complete control over the target without any influence of other shareholders are considered.

Furthermore, the sample includes only acquisitions with a deal value greater than 100 million

euros. By including acquisitions with high deal value only, it is more likely that firms’ top

executive managers will be involved in the deal. This allows for a clearer view on the role of

executive board cultural diversity on acquisition performance.

The sample consists of acquisitions by firms headquartered in one of the countries of the

European Union. All acquisitions in the sample are cross-border acquisitions. This means that the

14

target is headquartered in another country than the acquirer. Targets located in so-called tax havens

(e.g. Cayman Islands) are excluded from the sample since firms mostly expand to these countries

for a more favorable tax arrangement, not for value creation through operational means.

Furthermore, firms in the sample should not have engaged in other acquisitions within three years

before or after an acquisition, to prevent having overlapping events in the sample.

The initial sample consisted of 671 acquisitions. However, most of the acquirers in this

sample engaged in multiple acquisitions throughout the years. After removing these, and removing

firms acquiring firms in tax-havens, with unavailable data, and outliers, a sample of 120

acquisitions, conducted between 2007 and 2012, remained. Appendix A provides an overview of

all the acquiring and target countries represented in the sample. Data regarding the composition

and characteristics of the executive board and its directors is hand-picked by going through the

annual reports of the acquiring firms and complemented with data from additional sources (e.g.

Bloomberg and Thomson Reuters). Firm-specific performance data and characteristics are

extracted from the Orbis database of Bureau van Dijk. Lastly, country-specific variables such as

import, export, and GDP per capita are extracted from the Worldbank database, and data on

bilateral trade flows between the target and the acquirer country is extracted from the STAN

Bilateral trade database of the OECD.

3.2 Variables

Independent variables

The first independent variable in this thesis is the cultural distance between the acquirer

country and the target country. The higher the cultural distance between the target and acquirer,

the more cultural differences exist, and the harder it is to create value in acquisitions. Kogut and

Singh (1988) developed a measure calculating the cultural distance between two countries based

on the six cultural dimensions identified by Hofstede et al. (2010). This measure is widely used in

the finance literature. The cultural distance between two countries is defined using the following

formula:

𝐶𝐷𝑘𝑙 =

∑ (𝐼𝑝𝑘6𝑝=1 − 𝐼𝑝𝑙)/𝑉𝑝

6 (1)

15

Where CDkl is the cultural distance between acquirer country k and target country l, Ipk is

acquirer country k’s score on the pth cultural dimension, Ipl is target country’s l’s score on the pth

cultural dimension, and Vp is the variance of the score of dimension p.

The second independent variable used is executive board cultural diversity. The more

cultural clusters represented in an executive board, the more culturally diverse this board is, and

the more likely it will be that the acquisition will create value. The cultural clusters used in this

study are derived from the GLOBE-study (House, 2004). This study grouped a large number of

countries into several clusters, based on the cultural characteristics of these countries. The degree

of cultural diversity on the board in the year before the acquisition is measured using the Blau-

index (Blau, 1977; Harrison and Klein, 2007). The Blau-index calculates the level of diversity

using the following formula:

𝐷𝐼𝑉𝑖 = 1 − ∑ (𝑥𝑚𝑖

𝑛𝑖)

2𝑝

𝑖=1

(2)

Where DIVi is the cultural diversity within the executive board of firm i, p is the total

number of cultural clusters represented in the board, xmi is the number of members from cultural

cluster m in the executive board of firm i, ni is the total number of members in the executive board

of firm i. The scores of the index reach from 0 (completely homogeneous) to 1 (complete

heterogeneous).

Lastly, a variable measuring the percentage of executive board members from the target

company’s country is included. These executives could help the acquiring company overcome the

liability of foreignness and therefore boost long-term acquisition performance. This variable is

calculated by dividing the number of members of the executive board from the target company’s

country by the total number of members in the executive board.

Control Variables

The analysis includes a set of board-specific control variables. Firstly, the average age of

the board members is included in the regressions as a commonly used indicator of experience.

(Oxelheim et al., 2013). Older managers are likely to be more experienced in the field of

acquisitions, and this could affect the acquisition-performance relationship (Cannella and

Hambrick, 1993; Krishnan et al., 1997). However, older managers, compared to younger ones, are

16

less likely to come up with creative and innovative strategies and, in general, are less flexible

(Rivas, 2012).

Secondly, a variable controlling for board size will be included. The level of heterogeneity

of the board may be influenced by the size of the board. The influence of a single person might be

reduced in larger boards (Amason and Sapienza, 1997; Haleblian and Finkelstein, 1993). This

could affect the relationship between board diversity and acquisition performance.

Some firm-specific control variables are included as well. A variable controlling for firm

age will be included by taking the natural logarithm of a firm’s age. Older firms may be more

experienced in international acquisitions, which might affect the acquisition-performance

relationship. For example, Fowler and Schmidt (1989) showed that post-acquisition financial

performance was higher for older firms. A control variable for firm size is included as well.

Moeller et al. (2004) found that small acquisitions by small acquirers resulted in increased

performance, whereas large acquisitions by large acquirers led to losses. Conversely, Healy et al.

(1992) found that large acquisitions normally resulted in positive post-acquisition performance.

Thus, firm size is likely to affect acquisition performance in important ways, although further

research is needed to find out how exactly. To control for firm size, a variable measuring the

natural logarithm of the acquiring firm’s total assets by the end of the year prior to the acquisition

is used, a common way to measure firm size in the finance literature.

Besides the control variables on firm level, some country specific control variables are also

included in the analysis. These control variables ensure that the results are not driven by trade or

GDP differences between countries, instead of culture. Firstly, a variable controlling for the

economic differences between the countries is included. Economic differences between two

countries might affect the performance of an acquisition (Chakrabarti et al., 2009). To measure

these differences, the difference in GDP per capita of these countries is measured, which is often

associated with major socio-economic differences between countries. The economic disparity of

the two nations is calculated as follows:

𝐸𝐷𝑘𝑙 = 𝐺𝐷𝑃𝑘 − 𝐺𝐷𝑃𝑙

𝐺𝐷𝑃𝑘 + 𝐺𝐷𝑃𝑙

(3)

Where EDkl is economic disparity between acquirer country k and target country l, GDPk

is the GDP per capita of acquirer country k in the year prior to the acquisition, and GDPl is the

17

GDP per capita of target country l in the year prior to the acquisition. Secondly, a variable

measuring the openness of the target to the world economy is added to the analysis. The openness

of a country to the global economy could have an impact on acquisition performance. It could

make managing the newly acquired business easier, and the new business division’s profits can be

employed more efficiently (Chakrabarti et al., 2009). The openness of a target’s firm country to

international firms is calculated as follows:

𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠𝑙 = 𝐼𝑚𝑝𝑜𝑟𝑡𝑙 + 𝐸𝑥𝑝𝑜𝑟𝑡𝑙

𝐺𝐷𝑃𝑙

(4)

Where Opennessl is the openness of target country l to the world economy, Importl is the

total import of target country l in the year prior to the acquisition, Exportl is the total export of

target country l in the year prior to the acquisition, and GDPl is the GDP of target country l in the

year prior to the acquisition. Thirdly, a variable is included that controls for economic synergies

between the acquiring and target country. This variable is calculated by taking the natural

logarithm of the sum of the target nation’s export to, and import from the acquiring firm’s country

(Chakrabarti et al., 2009):

𝐵𝑖𝑙𝑎𝑡𝑒𝑟𝑎𝑙𝑘𝑙 = 𝑙𝑛 (𝐸𝑥𝑝𝑜𝑟𝑡𝑙𝑘 + 𝐼𝑚𝑝𝑜𝑟𝑡𝑙𝑘) (5)

Where Bilateralkl displays the economic synergies between acquirer country k and target

country l, Exportlk is the export of target nation l to acquirer nation k, and Importlk is the import of

target nation l from acquirer nation k. Lastly, a variable is added controlling for the geographic

distance between the acquirer country k and the target country l. Frankel and Romer (1999) showed

that geographic distance between countries affects international trade. The variable is defined by

taking the natural logarithm of the distance between the capital cities of acquirer country k and

target country l. Data of distances between the capital cities is gathered using the ‘Distance

between Capital Cities Data’ dataset of Kristian Gleditsch.

Table 1 provides descriptive statistics and a correlation matrix of the independent variables

and control variables. The correlation table and additional tests show no signs of multicollinearity

issues in the sample.

18

T

ab

le 1

D

escr

ipti

ve

stat

isti

cs

and

co

rrel

atio

n m

atri

x o

f in

dep

end

ent

and

co

ntr

ol

var

iab

les

Pa

nel

a:

Des

crip

tive

sta

tist

ics

Ind

epen

den

t va

ria

ble

s M

ean

S

t. d

ev.

Min

M

ax

Med

ian

CD

1

.36

7

1.1

30

0.1

95

6.6

71

1.5

02

CD

IV

0.2

10

0.2

38

0

0.7

20

0

% f

rom

TC

0

.08

12

0.1

60

0

0.8

57

0

Bo

ard

age

50

.99

4.0

70

39

.40

64

51

.402

Bo

ard

size

6

.32

5

3.3

46

2

14

6

Fir

msi

ze

15

.33

1.9

17

9.3

72

19

.95

15

.238

Fir

mage

3.3

92

1.5

12

0

5.8

35

3.4

01

Op

enness

4

9.3

0

47

.213

22

.52

43

2.9

2

8.1

82

ED

0

.12

4

0.3

64

-0.4

02

0.9

34

-0.0

30

Bil

ater

al

17

.02

1.7

56

11

.14

19

.34

17

.699

GD

8

.53

3

0.6

61

6.0

38

9.6

91

8.6

88

Pa

nel

b:

Co

rrel

ati

on

ma

trix

C

Ds.

C

DIV

%

_T

C

Bo

ard

age

Bo

ard

size

F

irm

size

F

irm

age

Op

enness

E

D d

B

ilat

eral

G

D

CD

1

.00

0

CD

IV

0.1

34

1.0

00

% f

rom

TC

-0

.13

2

0.1

75

1.0

00

Bo

ard

age

-0.1

93

-0.1

74

-0.0

91

1.0

00

Bo

ard

size

0

.19

1

0.3

25

0.1

63

-0.1

19

1.0

00

Fir

msi

ze

0.1

60

-0.0

63

-0.0

39

0.2

01

0.2

31

1.0

00

Fir

mage

0.0

96

-0.0

27

-0.1

07

0.1

85

0.0

53

0.1

87

1.0

00

Op

enness

0

.29

7

0.0

18

-0.1

03

-0.1

25

-0.0

47

-0.1

33

-0.0

91

1.0

00

ED

0

.49

6

0.2

44

-0.2

09

-0.2

09

0.1

03

0.1

55

0.0

40

0.2

48

1

.00

0

Bil

ater

al

-0.4

68

-0.1

00

0.0

89

0.1

67

-0.1

02

-0.0

40

0.1

49

-0.4

49

-0

.61

2

1.0

00

GD

0

.02

6

0.1

12

0.0

90

0.0

62

-0.0

09

-0.0

55

0.1

27

-0.2

81

0

.07

5

0.0

50

1.0

00

19

3.2 Methodology

One of the most common ways of measuring acquisition performance is by conducting a

short-term event study (Datta and Puia, 1995; Li, Li and Wang, 2016). However, by doing so, only

the performance effects around the announcement date of an acquisition are captured.

Furthermore, research has shown that investors tend to overreact on the announcement of certain

events (De Bondt and Thaler, 1985). Thus, the performance measured in a short-term event study

does not always reflect underlying firm performance reliably and does not predict future

performance. This thesis focuses on the long-term performance of the acquirer after an

international acquisition and the influence of cultural board diversity on this performance. By

focusing on the long-term, it becomes clear if the acquiring company was able to integrate the two

entities properly and capture the possible synergies. A methodology commonly used in the finance

and business literature to capture the long-term performance is the ‘buy-and-hold abnormal

returns’ (BHAR) methodology (Barber and Lyon, 1997). This methodology focuses on the long-

term stock returns of a company after a certain event to precisely measure investor experience. In

this thesis, the BHAR-methodology as used by Chakrabarti et al. (2009) will be closely followed

in testing the hypotheses. The methodology utilized in this thesis distinguishes itself from the

methodology used by Chakrabarti et al. (2009) by including firm-level variables as well, where

Chakrabarti et al. (2009) highlight the role of country-level variables on long-term stock

performance only. The used methodology indicates the excess return over the market portfolio an

investor would generate if he bought the shares of the acquiring company in the month of the

acquisition, and hold them for 36 months. The BHAR over a 36 months’ time window is calculated

by compounding the monthly returns of the acquiring firm’s stock and the monthly returns of the

market index of this firm’s country and subtracting the return on the market from the return on the

acquiring firm’s stock. So, the BHAR methodology measures the total return from a buy-and-hold

strategy in which a share of the acquiring company is purchased at the end of the month the

acquisition became effective, and held for a three-year period.

The BHAR-methodology is standard in measuring long-term stock performance after

certain events like acquisitions because it ‘precisely measures investor experience’ (Barber and

Lyon, 1997). Furthermore, since it does not measure performance in the announcement period, it

is less subject to investor overreaction. However, Mitchell and Stafford (2000) criticize the

independence assumption of multi-year abnormal returns of the event-firms in this methodology.

20

They propose an alternative measure which accounts for the dependence of event-firm abnormal

returns, namely the calendar-time portfolio returns (CTAR) measure. However, in this thesis, a

multi-country sample is being used which reduces the likelihood of cross-sectional dependence.

Furthermore, by using year- and firm fixed effects, cross-sectional dependence is partially

accounted for (Chakrabarti et al., 2009). Besides that, the CTAR measure does not lend itself for

measuring the impact of certain variables, like cultural distance and international board diversity,

on long-term stock performance.

A common problem in cross-country performance analysis of acquisitions is the possible

presence of some country-level variables that are hard to control for. To minimize this problem, a

clustered regression with robust standard errors is used in this thesis. By doing so, it accounts for

clustering within the acquirer countries. Furthermore, target country fixed-effects are used. In this

way, there is being controlled for certain characteristics of the target countries, which is of

particular importance in this thesis since the majority of the target companies in this sample is

headquartered in one country, namely, the United States of America. Besides using target country

fixed-effects, year fixed-effects are used as well. Year fixed-effects are needed to control for time-

related factors. In this thesis, these time-related factors would be mostly related to the financial

crisis the world suffered in the period from 2007 to 2009.

To test the hypotheses, six different models are used. The first hypothesis of this thesis is

concerned with the effect of cultural distance between acquirer and target country on long-term

acquisition performance. A negative effect is expected. To test if this hypothesis is true, the

following regression model is used:

𝐵𝐻𝐴𝑅36𝑖 = 𝛼 + 𝛽1 ∗ 𝐶𝐷𝑘𝑙 + 𝛽2 ∗ 𝐵𝑜𝑎𝑟𝑑𝑎𝑔𝑒𝑖 + 𝛽3 ∗ 𝐵𝑜𝑎𝑟𝑑𝑠𝑖𝑧𝑒𝑖

+ 𝛽4 ∗ 𝐹𝑖𝑟𝑚𝑠𝑖𝑧𝑒𝑖 + 𝛽5 ∗ 𝐹𝑖𝑟𝑚𝑎𝑔𝑒𝑖 + 𝛽6 ∗ 𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠𝑙

+ 𝛽7 ∗ 𝐸𝐷𝑘𝑙 + 𝛽8 ∗ 𝐵𝑖𝑙𝑎𝑡𝑒𝑟𝑎𝑙𝑘𝑙 + 𝛽9 ∗ 𝐺𝐷𝑘𝑙 + 𝐹𝐸𝑡𝑐 + 𝛾𝑡 + 𝜀𝑖

(6)

Where BHAR36i is the cumulative 36 month buy-and-hold abnormal return of acquirer firm

i, CDkl is the cultural distance between acquirer country k and target country l, Boardagei is the

average age of the executive board of acquirer company i, Boardsizei is the size of the executive

board of company i, Firmsizei is the natural logarithm of acquirer firm i’s total assets, Firmagei is

the natural logarithm of acquirer firm i’s age, Opennessl is the openness of target country l to the

world economy, EDkl is economic disparity between acquirer country k and target country l,

21

Bilateralkl displays the economic synergies between acquirer country k and target country l, GDkl

is the natural logarithm of the geographic distance between acquirer country k and target country

l, FEtc are the target-country fixed-effects, and 𝛾𝑡 are the year fixed-effects.

To test whether cultural diversity within the executive board of the acquiring company has

a positive effect on long-term acquisition performance, as stated in hypothesis 2a, a variable for

cultural diversity is added to the regression:

𝐵𝐻𝐴𝑅36𝑖 = 𝛼 + 𝛽1 ∗ 𝐶𝐷𝑘𝑙 + 𝛽2 ∗ 𝐶𝐷𝐼𝑉𝑖 + 𝛽3 ∗ 𝐵𝑜𝑎𝑟𝑑𝑎𝑔𝑒𝑖

+ 𝛽4 ∗ 𝐵𝑜𝑎𝑟𝑑𝑠𝑖𝑧𝑒𝑖 + 𝛽5 ∗ 𝐹𝑖𝑟𝑚𝑠𝑖𝑧𝑒𝑖 + 𝛽6 ∗ 𝐹𝑖𝑟𝑚𝑎𝑔𝑒𝑖

+ 𝛽7 ∗ 𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠𝑙 + 𝛽8 ∗ 𝐸𝐷𝑘𝑙 + 𝛽9 ∗ 𝐵𝑖𝑙𝑎𝑡𝑒𝑟𝑎𝑙𝑘𝑙

+ 𝛽10 ∗ 𝐺𝐷𝑘𝑙 + 𝐹𝐸𝑡𝑐 + 𝛾𝑡 + 𝜀𝑖

(7)

Where CDIVi is the cultural diversity within the executive board of acquiring company i.

In the third model, an interaction term is added to see if the positive effect of cultural diversity

increases as the cultural distance between the acquirer and the target country increases, as stated

in hypothesis 2b. This leads to the following regression model:

𝐵𝐻𝐴𝑅36𝑖 = 𝛼 + 𝛽1 ∗ 𝐶𝐷𝑘𝑙 + 𝛽2 ∗ 𝐶𝐷𝐼𝑉𝑖 + 𝛽3 ∗ 𝐶𝐷𝑑𝑢𝑚𝑚𝑦

+ 𝛽4 ∗ 𝐶𝐷𝐼𝑉𝑖 ∗ 𝐶𝐷𝑑𝑢𝑚𝑚𝑦 + 𝛽5 ∗ 𝐵𝑜𝑎𝑟𝑑𝑎𝑔𝑒𝑖

+ 𝛽6 ∗ 𝐵𝑜𝑎𝑟𝑑𝑠𝑖𝑧𝑒𝑖 + 𝛽7 ∗ 𝐹𝑖𝑟𝑚𝑠𝑖𝑧𝑒𝑖 + 𝛽8 ∗ 𝐹𝑖𝑟𝑚𝑎𝑔𝑒𝑖

+ 𝛽9 ∗ 𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠𝑙 + 𝛽10 ∗ 𝐸𝐷𝑘𝑙 + 𝛽11 ∗ 𝐵𝑖𝑙𝑎𝑡𝑒𝑟𝑎𝑙𝑘𝑙

+ 𝛽12 ∗ 𝐺𝐷𝑘𝑙 + 𝐹𝐸𝑡𝑐 + 𝛾𝑡 + 𝜀𝑖

(8)

Where CDdummy is a dummy variable which takes value 1 for the acquisitions in the top

quarter regarding cultural distance, and value 0 for the other acquisitions in the sample. In the

fourth model, the cultural diversity variable is replaced by a variable measuring the percentage of

board members from the target country. As stated in hypothesis 3a, executives from the target

country could help the acquiring firm overcome their liability of foreignness. Thus it is expected

to have a positive influence. This leads to the following regression model:

22

𝐵𝐻𝐴𝑅36𝑖 = 𝛼 + 𝛽1 ∗ 𝐶𝐷𝑘𝑙 + 𝛽2 ∗ %𝑓𝑟𝑜𝑚𝑇𝐶𝑖+𝛽3 ∗ 𝐵𝑜𝑎𝑟𝑑𝑎𝑔𝑒𝑖

+ 𝛽4 ∗ 𝐵𝑜𝑎𝑟𝑑𝑠𝑖𝑧𝑒𝑖 + 𝛽5 ∗ 𝐹𝑖𝑟𝑚𝑠𝑖𝑧𝑒𝑖 + 𝛽6 ∗ 𝐹𝑖𝑟𝑚𝑎𝑔𝑒𝑖

+ 𝛽7 ∗ 𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠𝑙 + 𝛽8 ∗ 𝐸𝐷𝑘𝑙 + 𝛽9 ∗ 𝐵𝑖𝑙𝑎𝑡𝑒𝑟𝑎𝑙𝑘𝑙

+ 𝛽10 ∗ 𝐺𝐷𝑘𝑙 + 𝐹𝐸𝑡𝑐 + 𝛾𝑡 + 𝜀𝑖

(9)

Where %fromTCi is the percentage of members of the executive board of acquiring firm i

coming from the target country. As the cultural distance between acquirer and target increases, it

is likely the liability of foreignness will as well. Therefore, to test hypothesis 3b, the following

regression is conducted:

𝐵𝐻𝐴𝑅36𝑖 = 𝛼 + 𝛽1 ∗ 𝐶𝐷𝑘𝑙 + 𝛽2 ∗ %𝑓𝑟𝑜𝑚𝑇𝐶𝑖 + 𝛽3 ∗ 𝐶𝐷𝑑𝑢𝑚𝑚𝑦

+ 𝛽4 ∗ %𝑓𝑟𝑜𝑚𝑇𝐶𝑖 ∗ 𝐶𝐷𝑑𝑢𝑚𝑚𝑦 + 𝛽5 ∗ 𝐵𝑜𝑎𝑟𝑑𝑎𝑔𝑒𝑖

+ 𝛽6 ∗ 𝐵𝑜𝑎𝑟𝑑𝑠𝑖𝑧𝑒𝑖 + 𝛽7 ∗ 𝐹𝑖𝑟𝑚𝑠𝑖𝑧𝑒𝑖 + 𝛽8 ∗ 𝐹𝑖𝑟𝑚𝑎𝑔𝑒𝑖

+ 𝛽9 ∗ 𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠𝑙 + 𝛽10 ∗ 𝐸𝐷𝑘𝑙 + 𝛽11 ∗ 𝐵𝑖𝑙𝑎𝑡𝑒𝑟𝑎𝑙𝑘𝑙

+ 𝛽12 ∗ 𝐺𝐷𝑘𝑙 + 𝐹𝐸𝑡𝑐 + 𝛾𝑡 + 𝜀𝑖

(10)

Finally, both cultural board diversity and the percentage of board members from the target

country are included in the model, leading to the following regression:

𝐵𝐻𝐴𝑅36𝑖 = 𝛼 + 𝛽1 ∗ 𝐶𝐷𝑘𝑙 + 𝛽2 ∗ 𝐶𝐷𝐼𝑉𝑖 + 𝛽3 ∗ %𝑓𝑟𝑜𝑚𝑇𝐶𝑖

+ 𝛽4 ∗ 𝐵𝑜𝑎𝑟𝑑𝑎𝑔𝑒𝑖 + 𝛽5 ∗ 𝐵𝑜𝑎𝑟𝑑𝑠𝑖𝑧𝑒𝑖 + 𝛽6 ∗ 𝐹𝑖𝑟𝑚𝑠𝑖𝑧𝑒𝑖

+ 𝛽7 ∗ 𝐹𝑖𝑟𝑚𝑎𝑔𝑒𝑖 + 𝛽8 ∗ 𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠𝑙 + 𝛽9 ∗ 𝐸𝐷𝑘𝑙

+ 𝛽10 ∗ 𝐵𝑖𝑙𝑎𝑡𝑒𝑟𝑎𝑙𝑘𝑙 + 𝛽11 ∗ 𝐺𝐷𝑘𝑙 + 𝐹𝐸𝑡𝑐 + 𝛾𝑡 + 𝜀𝑖

(11)

4. Results

The results of the regressions are presented in this section. The overall long-term

performance of the firms in the sample will be discussed, followed by the results of the various

regression analyses conducted to test the hypotheses.

4.1 Multivariate clustered regression

Table 2 provides an overview of the BHAR of the acquiring companies in the sample in

the first three years following the acquisition. The table shows that most of the sample firms do

not manage to capture value in the first two and a half year after the acquisition, as shown by the

23

negative median of the BHAR in the first 30 months after the acquisition. Only the median of the

BHAR after 36 months is positive. Furthermore, the mean BHAR after 36 months is the only one

slightly significantly different from zero. What also attracts attention, is that the means are positive

throughout the whole 36 month period, while the medians are negative for most of the years. This

indicates that the gains by the ‘winners’ are bigger than the losses of the ‘losers’.

Table 3 presents the results of the regression of long-term performance on various

independent variables. The dependent variable in this regression is the buy-and-hold abnormal

return of acquiring companies over 36 months. The explanatory variables are cultural board

diversity, cultural distance, the percentage of members from the target country and the control

variables. The variables used in the regression analysis have been discussed in the previous section,

and are also presented in summary form in Appendix B. In all of these regressions, effective year

and target country fixed-effects are used to control for all time-related factors, like the financial

crisis, and unknown target country-specific variables that are hard to control for, besides the ones

included as control variables.

Table 3 presents six models. The dependent variable in each of these models is the 36-

month BHAR of the acquiring company. The first hypothesis predicts that cultural differences

acquirer and target country negatively affect long-term acquisition performance. Model 1 shows

that the cultural distance variable is not significant. This means that cultural differences between

acquirer and target country do not significantly affect the long-term acquisition performance of the

firms in this sample and thus, the regressions provide no evidence for hypothesis 1. The only

variables significant in this model are board age, the openness of the target country, and geographic

Table 2 Descriptive statistics for the ‘Buy-and-hold-abnormal-return’ following the acquisition

BHAR 36 BHAR 30 BHAR 24 BHAR 12

Mean 0.089 0.035 0.015 0.007

Median 0.040 -0.029 -0.049 -0.027

Min -1.833 -1.588 -1.227 -0.583

Max 2.808 2.377 1.773 1.051

St. dev. 0.706 0.585 0.481 0.289

P-value (BHAR>0) 0.085 0.260 0.367 0.369

24

distance. Board age is highly significant in all of the models. The results show that board age is

significantly negatively related to long-term acquisition performance. Thus, the older the board,

the worse the firm performs in international acquisitions. Furthermore, the model shows a positive

relationship between geographic distance and acquisition performance. This means that the

acquisition performance of the firms in the sample increases as the distance between the acquirer

and the target country increases. Lastly, limited evidence is found for the positive effect of

openness of the target country on international acquisition performance.

The second model includes the cultural board diversity variable. As predicted in hypothesis

2a, having a culturally diverse executive board is beneficial for acquiring firms in international

acquisitions. The cultural diversity variable is statistically and economically significant, as

acquiring firms’ abnormal returns significantly increase with cultural diversity in executive boards

after an international acquisition. This effect is even stronger as cultural distance between acquirer

and target country increases, as visible in model 3. This model shows that besides the main effect

of cultural board diversity, an interaction effect between cultural board diversity and cultural

distance is also present. This means that in the top acquisitions regarding cultural differences

between acquirer and target, culturally diverse boards added even more value. Thus, firms in the

sample who acquired a firm in a culturally different country, reaped more benefits from having a

culturally diverse board, as predicted by hypothesis 2b. Thus, both hypothesis 2a and 2b are

supported.

To see if acquiring firms benefit from having members from the target firm’s country on

the board, as expected in hypothesis 3a, model 4 includes a variable representing the percentage

of members from the target country. The results do not provide sufficient evidence for hypothesis

3a. Thus, in this sample, the presence of members from the target firm’s country do not

significantly affect long-term acquisition performance. Thus, hypothesis 3a is rejected. However,

evidence is found for a positive interaction effect between the presence of board members from

the target country and cultural distance, as presented in model 5. This means that companies that

acquire firms in countries with a very different culture compared to their own, benefit more from

having board members from the target country on their board, than companies acquiring firms in

culturally similar countries. Thus, the results support hypothesis 3b. In the last model, both the

cultural diversity and the percentage of members from the target country are included to see if this

changes the outcomes of the regressions. The results show that the cultural diversity variable

25

Tab

le 3

E

ffec

t o

f cu

ltu

ral

bo

ard

div

ersi

ty a

nd

hav

ing b

oar

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emb

ers

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et c

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ntr

y o

n a

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nd

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ld a

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al r

etu

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Ind

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den

t va

riab

les

Mo

del

1

Mo

del

2

Mo

del

3

Mo

del

4

Mo

del

5

Mo

del

6

Co

nst

ant

-10

.415

**

-9.7

09

**

-1.1

38

-10

.918

**

-7.2

17

**

-10

.281

**

(4

.19

0)

(4.1

90

) (2

.94

7)

(4.3

31

) (2

.85

1)

(4.2

47

)

Fir

msi

ze

0.0

06

0.0

20

0.0

27

0.0

15

0.0

28

0.0

25

(0

.04

4)

(0.0

35

) (0

.03

7)

(0.0

33

) (0

.03

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(0.0

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mag

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(0.0

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) (0

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5)

(0.0

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) (0

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4)

(0.0

36

)

Bo

ard

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-0.0

70

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72

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67

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56

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9)

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ffec

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arget

co

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y a

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sed

in

all

reg

ress

ion

s. C

lust

ered

reg

ress

ion

s ar

e co

nd

uct

ed t

o a

cco

un

t fo

r co

rrel

atio

n

bet

wee

n o

bse

rvat

ion

s o

f d

eals

in

clu

din

g a

cqu

irer

s fr

om

th

e sa

me

cou

ntr

y.

Th

e ro

bu

st s

tan

dar

d e

rro

rs a

s a

resu

lt o

f cl

ust

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g a

re r

epo

rted

in

par

enth

eses

.

**

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ant

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ant

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5%

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el,

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% l

evel

26

remains statistically and economically significant, thus providing additional evidence for

hypothesis 2b, and the variable representing the percentage of members from the target firm’s

country remains insignificant.

4.2 Robustness tests

To verify the robustness of the results, additional regressions are conducted. These

regressions use an alternative specification of long-term performance. The dependent variable is

the 30-month BHAR of the acquiring company instead of the 36 month BHAR, as proposed by

Chakrabarti et al. (2009). Table 4 presents the outcomes of these regressions. This table presents

similar results as table 3. Board age is highly significant in all of the models, geographic distance

remains significant, cultural board diversity positively influences long-term acquisition

performance and this effect is greater if an acquisition is characterized by a high cultural distance

between acquirer and target, and having board members from the target firm’s country is more

beneficial for firms acquiring culturally distant targets. Thus, the robustness tests show that the

results of this thesis are robust.

5. Discussion

This section discusses the findings as reported in the previous section. In general, the

sample firms performed well in the long run after an international acquisition. The average 36-

month buy-and-hold abnormal return is positive and significant. However, the results show that

the median BHAR is negative in the first 30 months following the acquisition. This indicates that

although most firms manage to capture value in these acquisitions in the long run, it might take

some time to successfully integrate the two entities and start reaping benefits from the acquisition.

These findings are in line with the findings of Chakrabarti et al. (2009). Regression analysis

provided evidence of the effect of several variables, on country and firm level, on the long-term

acquisition performance of the firms in the sample. These variables are discussed below.

5.1 Cultural distance

Firstly, on country level, the influence of cultural differences between the acquirer and the

target is discussed. An impeding effect of cultural distance on long-term international acquisition

performance was hypothesized. Scholars provided several reasons why cultural distance could

have a negative effect on long-term international acquisition performance. Examples are the

likelihood of conflicts between people from different cultures (Hofstede et al., 2010), unsuccessful

27

Tab

le 4

E

ffec

t o

f cu

ltu

ral

bo

ard

div

ersi

ty a

nd

hav

ing b

oar

d m

emb

ers

fro

m t

arg

et c

ou

ntr

y o

n a

fir

m’s

30

mo

nth

s bu

y-a

nd

-ho

ld a

bn

orm

al r

etu

rn

Ind

epen

den

t va

riab

les

Mo

del

1

Mo

del

2

Mo

del

3

Mo

del

4

Mo

del

5

Mo

del

6

Co

nst

ant

-5.9

15

-5.4

41

0.3

30

-6.2

00

-4.2

37

*

-5.7

49

(3

.79

7)

(3.6

47

) (2

.28

8)

(3.7

13

) (2

.29

8)

(3.5

02

)

Fir

msi

ze

0.0

11

0.0

20

0.0

26

0.0

16

0.0

26

0.0

23

(0

.03

3)

(0.0

27

) (0

.02

8)

(0.0

27

) (0

.02

5)

(0.0

23

)

Fir

mag

e

-0.0

17

-0.0

12

-0.0

08

-0.0

15

0.0

00

-0.0

12

(0

.06

4)

(0.0

69

) (0

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8)

(0.0

65

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0)

(0.0

69

)

Bo

ard

size

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) (0

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) (0

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(0.0

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Bo

ard

age

-0.0

59

***

-0.0

60

***

-0.0

57

***

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***

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of

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acq

uis

itio

n.

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ed-e

ffec

ts f

or

effe

ctiv

e yea

r an

d t

arget

co

untr

y a

re u

sed

in

all

reg

ress

ion

s. C

lust

ered

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ress

ion

s ar

e co

nd

uct

ed t

o a

cco

un

t fo

r co

rrel

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n

bet

wee

n o

bse

rvat

ion

s o

f d

eals

in

clu

din

g a

cqu

irer

s fr

om

th

e sa

me

cou

ntr

y.

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e ro

bu

st s

tan

dar

d e

rro

rs a

s a

resu

lt o

f cl

ust

erin

g a

re r

epo

rted

in

par

enth

eses

.

**

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ign

ific

ant

at t

he

1%

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ign

ific

ant

at t

he

5%

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gn

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at t

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10

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evel

28

integration due to difficulties in knowledge exchange (Lin and Germain, 1998), lower commitment

and cooperation by the employees of the acquired firm (Very et al., 1996), differences in

administrative routines between cultures leading to misunderstanding about assignments (Heiman

et al., 2008; Heiman and Nickerson, 2004), and finally, more day-to-day operating conflicts may

arise (Jemison and Sitkin, 1986). Thus, one would expect cultural distance to influence the

performance of international acquisitions negatively. The results provide no evidence for an

adverse effect of cultural distance on long-term international acquisition performance. This could

mean that acquirers are aware of the possible difficulties arising because of cultural differences in

international acquisitions. Therefore, the process of selecting acquisition targets of the acquirer is

likely to be more strict. This means that acquirer firms only go through with acquisitions

characterized by a high cultural distance if this deal has substantial economic potential (Aguilera

et al., 2004; Nahata et al., 2014).

Besides challenges, cultural distance could provide some opportunities as well. Chakrabarti

et al. (2009) argued that acquiring firms in culturally distant countries could provide the acquiring

firm access to unique and potentially valuable capabilities. Furthermore, culturally distant

acquisitions could break rigidities and therefore enhance innovation and learning. Another possible

positive effect is found by Goulet and Schweiger (2006). They state that managers are more

predisposed to manage cultural differences in acquisitions characterized by a high cultural

distance.

In conclusion, it seems evident that cultural distance will have an impeding effect on

international acquisition performance. However, the results do not show such a negative effect.

Reasons for this could be the increased awareness among managers in the case of culturally distant

acquisitions which lead to better due diligence. Besides awareness, culturally distant acquisitions

could also provide unique and valuable access to resources or alter the mindset of the acquiring

managers. These factors could offset the negative implications of cultural distance for international

acquisition performance. This seems the case in this thesis’s sample, were no significant negative

effect is found for cultural distance on long-term international acquisition performance.

5.2 Cultural board diversity

Besides the effects of country-level cultural variables, the influence of some firm-level

variables has been tested as well. The first firm-level variable being tested is cultural board

diversity. A positive relationship between cultural diversity within the executive board and

29

international acquisition performance was hypothesized. The literature provided several reasons

for the positive effects of diversity within groups. These reasons are the higher absorptive capacity

of diverse groups (Reus and Lamont, 2007), the access to a greater pool of task-relevant

knowledge, skills and abilities (Rivas, 2012), more knowledge on different cultures, needed for

international success (Alon and Higgins, 2005), the higher level of creativity and problem-solving

capabilities (Dutton and Duncan, 1987), culturally diverse groups are less subject to the domestic

myopia concept (Barkema and Vermeulen, 1998), it could generate trust among a firm’s product

and geographic unit managers (Kim and Mauborgne, 1991), and the increased socio-cognitively

complexity, leading to a higher ability to cope with changing international market opportunities

and handling conflicts and paradoxes related to international acquisition (Murtha et al., 1998).

The results of the regressions are in line with the theories proposed by these scholars. The

cultural diversity index is significant in the main regressions and the robustness tests. Thus, it

seems that having members of different cultural backgrounds on the executive board is beneficial

for firms in acquiring foreign companies. The executive board is responsible for implementing

strategy and handling day-to-day operations (Fama and Jensen, 1983). In the case of acquisitions,

this means they are concerned with the integration process after the acquisition is effective. The

results show that cultural diversity is beneficial in this process. Thus, it seems that the benefits

provided by cultural diversity could help firms overcome the difficulties related to international

acquisitions.

Cultural board diversity and cultural distance

The results also provide evidence for cultural board diversity being more beneficial as

cultural distance increases. Thus, as the complexity of an acquisition increases due to greater

differences in national cultures between the acquirer and the target, the more beneficial it is for

acquiring companies to have an executive board composed of members of different cultural

backgrounds. Reason for this could be that diverse board are more creative in problem-solving and

better able to cope with complex environments (Dutton and Duncan, 1987; Murtha et al., 1998)

5.3 Executive board members from target country

The second firm-level variable tested is the percentage of executive board members from

the target country. Previous literature provided several reasons why it could be beneficial to have

members from the country in which the target firm is headquartered on the executive board for a

30

firm engaging in international acquisitions. These board members could help the acquiring firms

overcome the liability of foreignness. This means that they could provide the firm with knowledge

of the target country’s market (Zaheer and Mosakowski, 1997) and useful connections in the target

country (Tihanyi et al., 2000). Furthermore, it could help the acquirer overcome difficulties

regarding differences in language between the acquirer and the target (Piekkari et al., 2005). The

results, do not provide sufficient evidence for this hypothesis. However, highly significant

evidence is found for a positive interaction effect between having executive board members from

the target firm’s country and cultural distance. This implies that in the case of an acquisition

characterized by a high cultural distance between target and acquirer, executive board members

could provide the acquiring company with knowledge on the cultural characteristics of the target

firm’s country, and how to deal with the people and environment of that country. The liability of

foreignness problem is likely to be bigger in the case of a culturally distant acquisition. Executives

from the target country could provide the acquiring company with the connections needed to

succeed in that country or help the acquiring firm overcome difficulties related to language.

6. Conclusion

6.1 Summary

International acquisitions play a major role in the field of international business and gain

much attention from scholars. Many studies have tried to determine the performance effects of

engaging in international acquisitions and what triggers international acquisition performance.

Another field within business studies that gains increasing attention is board diversity and its role

in relation to firm performance. This thesis tries to contribute to these areas of literature by

focusing on the long-term performance effects of international acquisitions and the moderating

roles of cultural distance and cultural board diversity.

This thesis finds that, in general, firms are reaping benefits from international acquisitions,

which results in positive long-term performance after such an acquisition. Thus, by engaging in

international acquisitions, firms could get access to new and valuable resources, enhancing overall

firm performance. No evidence was found for the impeding effect of cultural distance on long-

term international acquisition performance. This could imply that the difficulties arising because

of cultural differences between the acquirer and the target are largely offset by the opportunities

resulting from acquiring a culturally distant target, or that acquirers are more careful in selecting

31

a foreign acquisition target. The thesis provides evidence for the positive performance effects of

having a culturally diverse executive board in international acquisitions. Culturally diverse

executive boards seem better able to tackle the difficulties coming with international acquisitions

and seem better able to help the company reaping the benefits of such acquisitions. This effect is

even stronger if the acquisition is characterized by a high cultural distance between acquirer and

target country. This implies that cultural knowledge within executive boards could help the

acquiring firm understand the culture of the target firm’s nation, and provide them with the needed

knowledge and capabilities required for coping with cultural differences and preventing cultural

conflicts. Furthermore, the results show that having executives from the target country is beneficial

if the acquirer and target are highly culturally different.

6.2 Implications for practice

The results of this thesis could have an important effect on the selection criteria used to

recruit board members both by international firms as human resource professionals. Firms willing

to expand their business to foreign markets by acquiring a foreign company could take diversity

into account while selecting new members for the executive board and take into consideration the

candidate’s cultural origin to gain the relevant cultural knowledge of the most important markets

a firm is operating in, or are planning on doing so. In this way, the knowledge of several cultural

regions could become an asset for the company. Besides, if the firm is planning on acquiring a

company in a culturally distant country, it could also recruit board members from the potential

target’s country to gain the needed knowledge of, and connections in the target country.

6.3 Limitations

This thesis suffers from several limitations. Firstly, this thesis provides no insights into the

processes and interactions within the executive board. Thus, it does not provide an explanation

how the individuals in the board come together to make decisions. Secondly, no distinction is being

made between the several board members in this thesis. Thus, the weight of the most powerful

individual, the CEO, is the same as the weight of the other board members. Further research is

needed on the processes within the executive boards and the role of the CEO. Thirdly, due to data

constraints, cultural board diversity is only measured in the year before the acquisition, and not

throughout the whole sample period. Thus, this thesis does not take into account changes in the

executive board composition after the acquisition is effective. However, board composition tends

32

to be reasonably stable over the years. Fourthly, this thesis does not look into other characteristics

of executives that could also indicate cultural knowledge or affect an executive’s approach in

dealing with other cultures, such as international work or study experience. Lastly, this thesis is

likely to suffer from a selection bias. It is probable that only well-established and profitable firms

will engage in a risky event such as an international acquisition. Only the acquisitions that are

predicted to be successful are undertaken. Therefore, acquisitions between certain countries are

more likely. So, the sample might be biased to certain combinations of acquirer and target

countries.

The BHAR-methodology used in this thesis also comes with some limitations. One of the

problems is related to the use of market portfolios as the benchmark portfolios and the calculation

the returns of these portfolios. The imperfect calculation of benchmark portfolio returns is not a

big issue in short-horizon studies, like an event study focusing on announcement returns, but the

choice of the benchmark can have a significant impact in long-term studies. This might result in

right-skewed abnormal returns (Fama, 1998). Another problem is called the new listing, or

survivor, bias. This arises because the firms in the sample are tracked for an extended post-event

period, but the index typically includes companies that begin trading after the event month (Lyon

et al., 1999). Furthermore, a rebalancing bias arises because the compound returns of the market

indices are typically calculated with periodic rebalancing of these indices. The returns of sample

firms are not compounded with rebalancing (Lyon et al., 1999). These limitations could result in

a misspecification of the test-statistics. This problem could be mitigated by increasing the sample

size. However, due to data availability, this is not possible in this thesis.

33

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Po

rtu

gal

0

0

0

0

0

0

0

0

0

0

1

0

1

Sp

ain

0

0

0

0

0

0

0

0

0

0

3

0

3

Sw

eden

0

1

0

1

0

0

0

0

1

0

6

0

1

1

Un

ited

Kin

gd

om

1

0

0

2

1

0

0

0

1

1

2

8

0

46

To

tal

1

1

2

4

1

1

2

1

4

4

74

1

12

0

38

Appendix B

Table B1 Description of the variables used in the regression and their sources

Cultural distance

(CD)

A measure representing the degree in which the cultures of two groups or

countries differ, calculated using the measure developed by Kogut and

Singh (1988)

Source: Hofstede et al. (2010) Cultural board diversity

(CDIV)

The degree to which several cultures are represented in a group, measured

using the Blau-index developed by Blau (1977), with possible values

between 0 (homogenous), and 1 (heterogeneous).

Source: hand-picked data

% of members from target

country

(%fromTC)

The percentage of executive board members of the acquiring firm, born in

the country where the target firm is headquartered.

Source: hand-picked

Cultural distance dummy

CDdummy

Dummy variable measuring whether an acquisition is characterized by a

high cultural distance or not. Takes value 1 for the acquisitions in the top

quarter regarding cultural distance, and value 0 for the other acquisitions

in the sample.

Source: Hofstede et al. (2010)

Interaction board diversity *

cultural distance

CDIV * CDdummy

Interaction variable measuring if the effect of cultural board diversity

increases as cultural distance increases

Source: hand-picked data and Hofstede et al. (2010)

Interaction % from target

country * cultural distance

%fromTC * CDdummy

Interaction variable measuring if the effect of having members from the

target country on the executive board increases as cultural distance

increases

Source: hand-picked data and Hofstede et al. (2010)

Firm size

Firmsize

The natural logarithm of the acquiring firm’s total assets

Source: Orbis

Firm age

Firmage

The natural logarithm of the acquiring firm’s age

Source: Orbis Board size

Boardsize

The number of members on the executive board of the acquiring firm

Source: hand-picked data

Board age

Boardage

The average age of the executive board members of the acquiring firm.

Source: hand-picked data Openness of target

Openness

Extent to which the target firm’s country’s economy is open to the world

economy, measured by dividing the sum of the target nation’s export and

import with its GDP

Source: Worldbank

Per capita income difference

ED Acquirer- and target countries’ GDP divided by population. Per capita

income difference is calculated by dividing the difference in GDP per

capita by the sum of both countries’ GDP per capita

Source: Worldbank Bilateral trade

Bilateral

Natural logarithm of the sum of target country’s export to, and import

from the acquirer’s country

Source: OECD’s STAN bilateral trade database

Geographical distance

GD

The natural logarithm of the geographic distance between the capital

cities of the acquirer- and the target country

Source: Kristian Gleditsch’s ‘Distance between Capital Cities Data’

39

Appendix C

Table C2 Description of cultural dimensions as identified by Hofstede et al. (2010)

Individualism The extent to which people feel independent, instead of feeling

interdependent as members of a larger group

Power distance Power distance is the extent to which the less powerful people accept

and expect that power is not distributed equally

Masculinity The extent to which the use of force is accepted socially

Uncertainty avoidance Deals with how a society copes with uncertainty and ambiguity

Long-term orientation Relates to the extent to which a society prepares for the future

Indulgence Related to the ‘good things in life’. In an indulgent culture it is good to

be free and enjoy your life, while in a restrained culture, the focus is

on duty, not freedom.