GROUPTHINK WITHIN BOARDS OF DIRECTORS

Mergers and acquisitions are impactful events in the day to day business of a company. There is a tremendous yearly number of takeover transactions. However, empirical research finds that buyer returns from a deal are mostly zero or negative. The paradoxical relationship between shareholder results and the size of the market for corporate control shows the importance of non-traditional financial research on the topic of mergers and acquisitions. Insights from behavioural economics can aid in the understanding of the size of the takeover market. Previous research has shown the importance of behavioural biases in the M&A process. It was found that CEOs that display hubris or a high level of overconfidence are more likely to attempt takeovers and these result in systematically lower returns compared to firms with CEOs that display lower levels of these biases. In this study the role of the board of directors is added to the existing behavioural insights in M&A literature. The CEO of the firm is not the sole decision maker in takeover deals, because a board of directors has the responsibility to oversee the CEO and to be involved in the strategic moves of the company. This makes them the other important buyer firm party that evaluates and decides on mergers and acquisitions. Like every team that has to operate under stressful conditions, the group dynamics of a board of directors is likely to influence the quality of their decisions. This thesis focusses specifically on groupthink. Groups that are prone to suffering from groupthink seek concurrence, view outside groups as a threat, dismiss alternative options, are overly optimistic, and fail to react to warning signs or new information in their decision making process. Within this research it is reasoned that protective measures, failure to properly make decisions and failure to evaluate decisions made by the CEO are indicators of an increased risk of suffering from groupthink. This results in five proxies for groupthink defined in this study: classified board structure, limitations to shareholders’ rights of calling special meetings, director indemnification, that CEO is board chair and that board members failed to attend at least 75 percent of meetings. Board size and whether the board includes female members are expected to influence the performance of boards of directors and are thus also added in the analyses. Similarly given the findings in previous research on CEO hubris and overconfidence and the self-attribution bias of a successful previous deal, proxies for these biases were also included. An event study methodology was used to determine if a board with a high probability of suffering from groupthink has lower buyer abnormal returns after a takeover deal. Furthermore, it was investigated whether boards scoring high on groupthink are less likely to cancel a deal. A multitude of research designs (parametric and non-parametric) were utilized to find an effect of the groupthink proxies on M&A results. The tests, however, do not affirm the hypotheses which expect decreased board performance due to groupthink. Therefore this thesis has to conclude that no effects of groupthink on board performance in M&A decisions can be found. The nature of the research design presents a dual hypothesis problem in this study. This implies that the lack of success to find any significant results of groupthink on takeover results can be caused either by the non-existence of groupthink influences on boards of directors or the failure of the proxies to measure groupthink. The former might be true because of agency problem protection mechanisms and performance based compensations plans that are present in most large firms. The latter is also likely given that there is no consensus in research on proper measurement of groupthink and that it is a phenomenon that might be only visible in observational and not in cross-sectional data. The scale of corporate transactions, their impact on buyer and target firms and the roles and responsibilities of boards of directors in this process require an understanding on board dynamics. Properly functioning boards are able to generate profits for their firms and there are relatively easy methods to battle groupthink. Further research on this topic should attempt to determine proper groupthink proxies which allow proper performance measurements.