sticky decisions: anchoring and equity stakes in international acquisitions

Anchoring and Equity Stakes 1

STICKY DECISIONS: ANCHORING AND EQUITY STAKES

IN INTERNATIONAL ACQUISITIONS

Shavin Malhotra University of Waterloo

Horatio M. Morgan

Ryerson University

Pengcheng Zhu

University of San Diego

Malhotra, S., Morgan, H.M., & Zhu, P. (2016). Sticky Decisions: Anchoring and Equity Stake in

International Acquisitions. Journal of Management, DOI: 10.1177/0149206316664008.

[Available at: http://jom.sagepub.com/content/early/2016/08/23/0149206316664008.abstract]

Acknowledgments: We thank the Associate Editor, Dr. Devi R. Gnyawali, and two anonymous

reviewers for their valuable and developmental feedback. We also thank Dr. Glen R. Whyte for

his suggestions on our earlier drafts. This research was supported by the Social Sciences and

Humanities Research Council of Canada through their Insight Grants program.

Corresponding author: Shavin Malhotra, Conrad Business, Entrepreneurship & Technology

Centre, Faculty of Engineering, University of Waterloo, 295 Hagey Boulevard, Suite 240,

Waterloo, Ontario, N2L 6R5, Canada.

E-mail: [email protected]

mailto:[email protected]


ABSTRACT

This study proposes an anchoring perspective on international equity ownership decisions. Given

the complex, uncertain nature of such decisions, we recognize the potential for heuristics such as

anchoring to replace time-consuming and information-intensive analyses; specifically, top

managers might draw on the recent international equity ownership decisions of others to

determine how much equity stake to purchase in foreign target firms. Drawing on standard

regression methods and more recently developed hedonic regression techniques, this study

reveals some systematic effects of anchoring in international equity ownership decisions.

Anchoring is more likely when international acquisitions occur under informational deficiencies

in genuinely uncertain settings, but less likely when the acquiring firms are managed by

overconfident CEOs.

Keywords: anchoring; heuristics; international equity ownership decisions; isomorphism;

managerial cognition; overconfidence


STICKY DECISIONS: ANCHORING AND EQUITY STAKES

IN INTERNATIONAL ACQUISITIONS

International acquisitions account for nearly half of all worldwide mergers and

acquisitions (M&As) (Bloomberg, 2011). Executives must choose the level of equity ownership

to buy in international target firms. This decision affects the acquiring firm’s control over its

international venture and its ability to redirect the venture’s strategies (Chari & Chang, 2009;

Folta, 1998; Gatignon & Anderson, 1988; Herrmann & Datta, 2006). For example, Walmart

increased its equity stake in Seiyu from 64.27% to 97.77% to gain more control over this

unprofitable Japanese venture. The equity ownership level also affects the firm’s resource

commitments and future risk exposures (Anderson & Gatignon, 1986; Chari & Chang, 2009),

which in turn affect its performance and survival in the host country (Chen & Hu, 2002;

Dhanaraj & Beamish, 2004).

Scholars use several theoretical frameworks to determine which factors influence firms’

international equity ownership decisions. These frameworks, which include the transaction cost

perspective (e.g., Brouthers & Brouthers, 2003; Henisz, 2000a), real options theory (e.g., Chari

& Chang, 2009), information asymmetry theory (e.g., Chen & Hennart, 2004; Malhotra & Gaur,

2014), and institutional theory (e.g., Davis, Desai, & Francis, 2000; Lu, 2002), assume a rational

choice paradigm. These approaches anticipate executives’ value-maximizing or value-optimizing

behaviors to facilitate decisions that limit unanticipated losses while capitalizing on better

conditions in foreign markets.

Although these theoretical frameworks provide useful insights, they do not systematically

address the influence of managerial cognition on international equity ownership decisions

(Brouthers & Hennart, 2007). This gap is surprising, because an upper echelons perspective


suggests that executives’ cognition and values influence strategic decisions, organizational

behavior, and outcomes (Carpenter, Geletkanycz, & Sanders, 2004; Christensen, Dhaliwal,

Doivie, & Graffin, 2015; Hambrick & Mason, 1984). Ultimately, top executives make choices

about international acquisitions. These choices are cognitively challenging and complex,

particularly when information is scarce (Duhaime & Schwenk, 1985; Haspeslagh & Jemison,

1991; Hitt & Tyler, 1991). To overcome these challenges, decision makers often use simple rules

or heuristics (Bingham & Eisenhardt, 2011; Gigerenzer & Gaissmaier, 2011).

We extend prior work on international equity ownership decisions by proposing that

managers might use heuristics when deciding on the equity level in an international acquisition.

In this study, we focus on one important and ubiquitous heuristic, anchoring, which refers to

decision makers’ use of an initial value (i.e., anchor) for estimating (Tversky & Kahneman,

1974). Under high levels of uncertainty, people may not sufficiently adjust from the anchor,

which can bias final estimates towards the anchor (Tversky & Kahneman, 1974). People

selectively access information that is consistent with the anchor while ignoring information that

is inconsistent (Mussweiler & Strack, 1999a). Studies show that anchors affect experts and non-

experts similarly (Northcraft & Neale, 1987; Mussweiler & Engich, 2005). People use anchors

even when warned not to (Wilson, Houston, Etling, & Brekke, 1996). Additionally, incentives

have not been shown to reduce anchoring (Tversky & Kahneman, 1974; Wilson et al., 1996). A

large body of empirical work shows that anchoring is prevalent in many important decisions (for

a review, see Furham & Boo, 2011). Hammond, Keeney, and Raiffa caution that “anchors

influence the decisions not only of managers, but also of accountants and engineers, bankers and

lawyers, consultants and stock analysts. No one can avoid their influence: they’re just too

widespread” (1998: 4).


In this study, we explore anchoring behavior in international equity ownership decisions.

Studies in behavioral economics and behavioral strategy emphasize that, in uncertain

environments, managers often rely on cognitive frameworks that limit their search to recent

information and past practices (Gavetti & Levinthal, 2000; Levinthal & March, 1993; March,

2006). Drawing on this work, we predict that executives will anchor their level of equity

ownership in an international acquisition (i.e., the focal international equity ownership level) on

the most recent level of equity ownership purchased by another foreign-based firm in the same

target country and industry (i.e., the previous international equity ownership level). We further

argue that the previous international equity ownership level will act as a stronger anchor when

executives encounter high levels of uncertainty in international acquisitions. Finally, we posit

that CEO overconfidence can inhibit anchoring, because CEOs tend to rely on knowledge from

their own memories, simple rules, and judgments.

Given our focus on why previous equity ownership decisions influence executives’ focal

decision-making process, our explanation for anchoring may seem similar to institutional

isomorphism. However, anchoring and isomorphism are fundamentally different. First,

anchoring relates mostly to value estimates, whereas institutional isomorphism focuses on

organizational practices or structures among organizations driven by legitimacy motives (e.g.,

DiMaggio & Powell, 1983; Haunschild, 1993). Our study focuses on a single quantitative

decision as opposed to broader organizational practices or processes.

Second, anchoring is a cognitive shortcut that can be “unintentional and nonconscious”

(Wilson et al., 1996: 389). Isomorphism involves deliberate, sociological processes: imitators

initially identify legitimate or successful firms with which they may have social or relational ties

(DiMaggio & Powell, 1983; Haunschild & Miner, 1997; Kostova & Roth, 2002), and they


subsequently attempt to interpret and act on information embedded in practices, structures, or

processes that are deemed advantageous (Lieberman & Asaba, 2006). With institutional

isomorphism, the focal acquirer copes with uncertainty by applying rules of inference whereby

superior acquiring firms and practices are identified as models for imitation. Anchoring does not

use such rules (Bahník & Strack, 2016; Mussweiler, 2003; Mussweiler & Strack, 1999a, 2000).

Our anchoring explanation in this study is not restricted to whether prior deals or prior focal

acquirers are more successful or legitimate.

Third, individuals often anchor on recent or convenient information (Altman, 2004).

Likewise, we propose that executives focus on the most recent international acquisition in the

host market, because it is psychologically convenient. With isomorphism, executives will gain

legitimacy by mimicking a pattern of prior acquisitions, not just the most recent one. In our

study, we focus on the most recent international acquisition only.

Our study makes two important contributions. First, by explaining the influence of

anchoring, an important judgmental heuristic, we extend prior research in the area of

international acquisition ownership decisions that has relied predominantly on the rationality-

optimization paradigm. We highlight that senior managers are likely to draw on heuristics, thus

extending the view that managerial cognition warrants closer attention in understanding

international acquisition ownership decisions. Second, we contribute to recent studies on the use

and effectiveness of heuristics in management strategy (Bingham & Eisenhardt, 2011; Maitland

& Sammartino, 2015; Malhotra, Zhu, & Reus, 2015) by drawing attention to the boundary

conditions surrounding heuristics, particularly how some cognitive attributes, such as

overconfidence, inhibit rather than enable the use of heuristics. We thus offer more nuanced

insights on how heuristics influence strategic decisions.


THEORY AND HYPOTHESES

Equity Ownership in International Acquisitions

Considerable research describes why executives acquire firms, enter a joint venture, enter

an alliance, or set up wholly owned subsidiaries in foreign markets (e.g., Barkema & Vermeulen,

1998; Brouthers & Hennart, 2007; Cho & Padmanabhan, 2005; Vermeulen & Barkema, 2001).

Executives prefer international acquisitions over other entry modes when they need to procure

advanced technologies or reputable brands, enter foreign markets quickly, improve capacity

utilization, or consolidate market power (Anand & Delios, 2002; Chen, 2008; Hennart & Park,

1993). The few studies that examine managers’ equity ownership decisions in international

acquisitions rely on an array of theories (Chari & Chang, 2009; Malhotra & Gaur, 2014).

The transaction cost perspective suggests that managers consider contractual hazards

when choosing a high-control (i.e., majority acquisition) or low-control (i.e., licensing, alliance,

or international joint venture) entry mode. Specifically, firms that are more vulnerable to acute

contractual hazards (e.g., costly hold-up, opportunistic renegotiations) than political hazards

(e.g., expropriation) often prefer a majority acquisition as a governance structure, because it can

manage contractual hazards in a cost-effective way (Henisz, 2000a; Zhao, Luo, & Suh, 2004).

The real options perspective centers on how value-maximizing firms optimally allocate their

financial resources to international expansion. For example, Chari and Chang (2009) find that

firms purchase partial ownership in foreign target firms to overcome their relative information

disadvantages and to capitalize on real options, in the form of follow-on equity investments,

when the uncertainty gets resolved. Based on an information asymmetry perspective, Chen and

Hennart (2004) propose that acquirers may opt for minority acquisitions when concerned with a

holdup problem by the target. In a minority acquisition, target firm managers will retain equity


stake in the merged firm, and thus will refrain from activities that will erode the wealth of the

firm (Chen & Hennart, 2004; Chi, 1994). Other studies using geographic distance as a proxy for

information asymmetry find that greater geographic distance leads to lower equity ownership in

foreign target firms (Ragozzino, 2009; Malhotra & Gaur, 2014). Drawing on an institutional

perspective (North, 1990; Scott, 1995), other scholars propose that the regulatory and cultural

underpinnings of foreign countries define the observed pattern of entry-mode decisions. By

accentuating the liability of foreignness (Zaheer, 1995), institutional differences may encourage

firms to pursue legitimacy in foreign markets through imitative behaviors (DiMaggio & Powell,

1983), especially in international settings (Chan, Makino, & Isobe, 2006; Davis et al., 2000; Lu,

2002).

To extend this literature, we emphasize that the high levels of uncertainty and

information asymmetry in international acquisitions impose substantial cognitive demands on top

managers. Therefore, it is important to understand how heuristics and mental models shape

international equity decisions.

Managerial Cognition and Heuristics

According to early behavioral economics, decision makers with incomplete knowledge

use heuristics or simple rules in uncertain environments (Gigerenzer & Gaissmaier, 2011;

Gigerenzer & Goldstein, 1996; Kahneman, 2011). This research draws heavily on work by

Tversky and Kahneman (1974), who integrate psychological realism into standard optimization-

or equilibrium-based models (Rabin, 2013). A key focus is how heuristics might lead decision

makers away from accurate information processing or reasoning. Recent studies suggest that

heuristics do not always cause biases (Gigerenzer & Gaissmaier, 2011). In particular, Gigerenzer

and Goldstein (1996) find that heuristics economize information and support timely decisions.


Behavioral strategy scholars have extended this work by studying how heuristics in

managerial decision making influence strategic decisions, organizational processes, and

organizational outcomes (Hodgkinson & Healey, 2007; Kaplan, 2011; Narayanan, Zane, &

Kemmerer, 2011; Priem, Walters, & Li, 2011). Managers cope with their cognitive limitations by

relying on mental frameworks (Nadkarni & Barr, 2008) or “simplified knowledge structures or

cognitive representations about how the business environment works” (Gary & Wood, 2011:

569). These mental models can simplify spatial, temporal, and causal relationships (Gavetti &

Levinthal, 2000; Weick, 1979). They also help filter information from the external environment

so that managers can focus on relevant information for strategic decisions (Huff, 1982;

Narayanan et al., 2011). In particular, managers might limit their search to recent information

and nearby locations when searching for cues in uncertain environments (Gavetti & Levinthal,

2000; Levinthal, 1997; Levinthal & March, 1993).

These mental models are likely influenced by executives’ demographics or personal

characteristics (Narayanan et al., 2011). A central tenet of the upper echelons perspective is that

top managers typically must interpret incomplete or ambiguous information when making

strategic decisions (Hambrick & Mason, 1984). However, their mental models tend to alter their

perception of reality and thereby affect their strategic choices (Hambrick & Mason, 1984;

Narayanan et al., 2011). Using the observable demographic attributes of top managers as proxies

for their mental models, previous research shows that various demographic characteristics (e.g.,

age, tenure, educational background, experience, political orientation) shape how they perceive

their businesses and environments, and thus affect their strategic decisions, organizational

behavior, and outcomes (e.g., Carpenter et al., 2004; Christensen et al., 2015).


Behavioral strategy research also recognizes a role for managerial cognition in the

acquisition process. Hitt and Tyler (1991) evoke an upper echelons perspective to describe the

process for evaluating a target firm:

executives of firms considering acquisitions should carefully analyze both their external

environment and internal operations and use the resulting analysis to evaluate potential

acquisitions … given the limits of human information processing capabilities, a top

executive evaluating different potential acquisitions can be expected to simplify the

decision process by limiting the criteria considered and by weighing some criteria more

heavily than others. (329)

Garbuio, King, and Lovallo (2011) find that managers are inclined to acquire resources with

which they are most familiar, independent of their relative economic or strategic significance.

Maitland and Sammartino (2015) examine how executives at an Australian mining company

make judgments when undertaking an acquisition in a politically hazardous African country.

They propose that the executives analyzed and adapted to this environment by constructing

small-world representations based on their understanding of the complex relationships among

different actors and events. Thus, different heuristics can be used to identify which information

to look for (“discovery heuristics”) and how to interpret it (“evaluation heuristics”). These

insights are consistent with previous research on the link between cognition and search heuristics

(Gavetti & Levinthal, 2000; Haley & Stumpf, 1989). In the case of international acquisitions, we

propose that executives may be inclined to decide on the level of international equity ownership

by engaging in anchoring.

Anchoring Theory

Anchoring constitutes a particularly interesting heuristic that can be traced to Tversky

and Kahneman’s (1974) landmark article on prospect theory. Decision makers become overly

influenced by some initial value, which biases their final decision in that direction (Tversky &

Kahneman, 1974). A growing body of research, predominantly in experimental psychology, has


investigated anchoring effects across many decisions (for a review, see Furham & Boo, 2011).

The mechanism can be explained according to a selectivity accessibility model (Mussweiler,

2003; Mussweiler & Strack, 1999a, 2000). People begin their estimation decisions with some

initial value in mind or some reference to what the response or decision could be, which is the

anchor. In their evaluation process, they search selectively for information, in their memory or

through an external search that is consistent with this anchor, which is the selectivity phase.

When they evaluate the gathered information to make their final decision, the anchor-consistent

information is more readily accessible; hence their final decision is close to their initial anchor.

This is the accessibility phase.

Prior work on anchoring was performed in controlled laboratory settings, which exposed

participants to anchors that were implausible or irrelevant to the focal decision. However, recent

studies indicate that anchoring also happens when anchors fall within an acceptable or plausible

range (Mussweiler & Englich, 2005; Mussweiler & Strack, 1999b). Plausible anchors come more

easily to mind, and it requires considerable effort to adjust away from them (Epley & Giolvich,

2006). For example, Northcraft and Neale (1987) find that real estate agents estimating the price

of a house anchor their decision on its list price, even though those same agents previously had

denied that list prices would influence their final estimation. Similarly, Shapira and Shaver

(2014) find that managers undertaking project investment decisions anchor their decisions on

average profit measures, which shifted their choices away from the optimal, profit-maximizing

investments. Beggs and Graddy (2009) show that a previous sale price (anchor) of a painting,

rather than its objectively estimated value, determines its subsequent sale price at auctions. As

with heuristics in general, despite the prevalence of anchoring in many decision domains, a


systematic investigation in real business settings is a recent phenomenon (Beggs & Graddy,

2009).

Previous and Focal International Acquisition Equity Levels

International acquisitions occur under high levels of information asymmetry, increasing

the difficulty that executives face in collecting valuable and reliable information about the target

firm (Ragozzino & Reuer, 2011; Reuer, Shenkar, & Ragozzino, 2004; Seth, Song, & Pettit,

2000). Executives may resort to simplified practices and a due diligence process that is not

sufficiently informative or analytically rigorous (Haspeslagh & Jemison, 1991). Preliminary

evidence suggests that anchoring occurs in M&As. For example, Baker, Pan, and Wurgler (2012)

show that managers’ decisions about acquisition premiums depend significantly on target firms’

peak stock prices in the previous 12 months. Premiums may increase for firms whose stock price

spiked even once in the previous 12 months. Similarly, Malhotra et al. (2015) show that

acquiring firms engage in anchoring when making premium decisions. Consistent with these

findings and with evidence that common business anchors include past events and decisions

(Hammond et al., 1998), we argue that previous international acquisition equity decisions in the

local market influence international acquisition equity ownership decisions.

The literature on managerial cognition argues that managers’ cognitive frameworks shape

their attention to specific, salient information in the environment (Marcel, Barr, & Duhaime,

2011). In particular, Thomas, Sussman and Henderson (2001) find that cognitive frameworks

lead managers to focus predominantly on past information. According to Gavetti and Levinthal

(2000), past practices often act as templates for managers’ future decisions. For example,

managers set future sales expectations by using previous years’ sales figures (Hammond et al.,


1998). Thus, a preceding international deal’s equity stake likely serves as an anchor point for

decision makers.

A previous international acquisition equity ownership level offers a meaningful anchor

for two reasons. First, it is likely that acquiring firm executives have been exposed to previous

international ownership equity decisions, because they perform transaction analyses to help make

strategic decisions (Rosenbaum & Pearl, 2009). As two directors of UBS investment banks who

have handled many large acquisition deals note, preceding transactional analyses serve to

“anchor valuations” (Rosenbaum & Pearl, 2009: 84). Precedent analyses involve evaluations of

previous acquisitions in the industry to gauge firm quality and local market conditions. Because

the local market’s previous international acquisition is the most recent international acquisition,

it also should be more easily recalled and offer the most current information. Therefore,

preceding international acquisition equity levels should be highly salient in executives’ cognitive

frameworks, which further increases the likelihood that executives notice and attend to this

number in their evaluation of the focal deal.

Second, foreign acquirers are more likely to anchor on previous international deals by

other foreign acquirers, which is in line with the influence of reference groups on decision

making. The managerial cognition literature emphasizes how reference groups shape managerial

strategy (Fiegenbaum & Thomas, 1995; Narayanan et al., 2011). That is, managers use reference

groups to access information, set aspiration levels, and select reference points (e.g., Epley, 2004;

Massini, Lewin, & Greve, 2005). People are often drawn to information from reference groups

and use it to structure their perceptual fields (Sherif, 1953) and set strategies (Fiegenbaum &

Thomas, 1995). Moreover, managerial attention increasingly focuses on information from

reference groups because of its relevance. For example, international acquirers face regulations,


market entry barriers, and social contexts that differ from those of domestic acquirers.

International decision makers thus associate with other international acquirers as reference

groups in similar situations. These combined features should induce acquiring firm executives to

use the previous equity ownership level of other international acquirers as an anchor when

making their own international acquisition equity ownership level decisions.

Hypothesis 1. The local market’s previous international acquisition equity ownership

level acts as an anchor for the focal international acquisition equity ownership level.

Uncertainty and Anchoring Behavior

Anchoring effects depend on the level of uncertainty that surrounds the decision in

question (Mussweiler & Strack, 2000). We consider two settings in which acquiring firm

executives likely confront non-trivial informational deficiencies and learning challenges. In the

first setting, a foreign target firm might operate in a different industry than the acquiring firm.

Industry relatedness between the acquiring and target firms is an important determinant of

uncertainty and information asymmetry in international deals (Chari & Chang, 2009; Malhotra &

Gaur, 2014; Malhotra, Sivakumar, & Zhu, 2011). When foreign target firms operate in unrelated

industries, acquiring firm executives confront unfamiliar circumstances and informational

barriers, such as limited practical knowledge about the unrelated industry’s shared norms,

procedures, and standards (Huff, 1982). By pursuing foreign target firms in unrelated industries,

acquiring firms widen the gap between the information and experience they need to evaluate and

execute an international acquisition and the knowledge and experience they already have

accumulated in their own industry. This enlarged gap could accentuate information asymmetry

problems, such that executives have relatively little information about the foreign target firm’s

true potential or the future prospects for its industry (Chari & Chang, 2009; Chen & Hennart,

2004; Malhotra & Gaur, 2014; Reuer & Koza, 2000). These information deficiencies thus


suggest that acquiring firms may find it difficult and costly to conduct information-intensive

analyses, in terms of executive time, financial resources, and cognitive resources. Anchoring is

particularly likely to emerge in this setting.

In the second setting, executives might face informational deficiencies when they pursue

foreign target firms in unstable or highly volatile countries. Multinational enterprises risk being

exploited when they invest in countries in which governments are not legally or politically

restrained (Henisz, 2000b). In response to such political hazards, executives might employ

mitigating governance structures, such as a majority acquisition (Henisz, 2000a). The inherently

unstable nature of a politically hazardous environment prevents long-range planning and

forecasting exercises that are standard business practices in institutionally developed

environments, thus creating a role for heuristics. As Maitland and Sammartino (2015) show,

senior executives attempt to cope with uncertainty in politically unstable environments by

forming perceptions about complex structural relationships among different actors and events

and their potential influence on those relationships. We propose that the same informational

challenges could lead acquiring firm executives to exhibit anchoring behavior. Considering both

channels, we predict

Hypothesis 2. The previous international acquisition equity ownership level in the local

market acts as a strong anchor for the focal international acquisition equity ownership

level when (a) the foreign target firm operates in an unrelated industry and (b) the

acquiring firm enters less politically stable environments.

Overconfidence and Anchoring Behavior

In keeping with an upper echelons perspective (Hambrick & Mason, 1984), previous

research has linked aggressive bidding behavior by acquirers to hubris or overconfidence in their

senior executives (Hayward & Hambrick, 1997; Roll, 1986; Seth et al., 2000). Overconfidence in

senior executives may be explained in terms of differences in their self-assessments. For


example, based on the concept of core self-evaluation, overconfident CEOs are likely to exhibit

higher levels of self-esteem, self-efficacy, internal locus of control, and/or emotional stability

than other CEOs (Hiller & Hambrick, 2005). On a whole, this implies that overconfident CEOs

might have higher levels of core self-evaluation than other CEOs. The potentially enhanced

levels of core self-evaluation in overconfident CEOs may also be manifested in their tendencies

to judge themselves to be better than average (Malmendier & Tate, 2005). In addition, they

might overestimate their abilities and prospects for success on particularly difficult tasks (Cain,

Moore, & Haran, 2015; Windschitl, Kruger, & Simms, 2003). When undertaking tasks as

difficult as international acquisition deals, CEOs may exhibit overconfidence because of the

tendency to overestimate their ability or chance of success. We also expect overconfident CEOs

to favor the accuracy of their memories, simple rules, and judgments over others’ (cf. Dunning,

Griffin, Milojkovic, & Ross, 1990; Talarico & Rubin, 2003; Wells & Olson, 2003). Thus, when

faced with international equity ownership decisions, they are predisposed to activate and act on

knowledge from their own memories, simple rules, and judgments; hence, the previous levels of

equity purchased in foreign target firms by others is less likely to emerge as an anchor among

overconfident CEOs. Therefore, we propose

Hypothesis 3: The previous international acquisition equity ownership level in the local

market acts as a weak anchor for the focal international acquisition equity ownership

level when the acquiring firm’s CEO is overconfident.

METHODS

Sample

We collected information on completed international acquisition deals between 1990 and

2009 from the Securities Data Corporation Platinum database. In line with prior studies, we

omitted transaction values of less than $1 million (e.g., Fuller, Netter, & Stegemoller, 2002;


Moeller, Schlingemann, & Stulz, 2005). We then merged firm-level information from the

Compustat Global database and country-level information from the World Development

Indicator database. We collected institutional measures from the World Bank. For our empirical

analysis, we also collected firm-level information for the most recent preceding international

acquisitions in the host country and target industry (anchor). After we merged all variables and

removed missing values, the final sample of observations with complete data included 4,491

deals. The acquirers’ sample includes observations from 50 countries and covers 55 industries

(using two-digit standard industrial classification [SIC] codes). The median deal value was US

$37 million.

Dependent and Independent Variables

We determined the ownership acquired in the focal international acquisition from the

Securities Data Corporation. This continuous variable ranges from 0.1% to 100% and is similar

to measures used in other studies (Chari & Chang, 2009; Delios & Henisz, 2000; Malhotra &

Gaur, 2014). The key explanatory variable is ownership acquired in the international acquisition

preceding the focal deal in the host country and target industry (by four-digit SIC code). We

calculated the ownership variable for the previous international acquisition by using a method

similar to that used to measure ownership of the focal international acquisition.

In line with prior studies (Malhotra & Gaur, 2014; Malhotra et al., 2011; Reuer et al.,

2004), we assessed deals in unrelated industries with a dummy variable that equals 1 if the

acquiring firm and the target firm did not share the same four-digit SIC code and zero otherwise.

To measure political stability, we used the Worldwide Governance Indicators developed by the

World Bank, which range from -2.5 (high political risk) to 2.5 (low political risk).


Following Malmendier and Tate (2008) and Campbell et al. (2011), we created a CEO

overconfidence dummy variable equal to 1 if the acquiring firm’s CEO has more than 67% “in-

the-money” stock options (i.e., the stock price exceeds the exercise price by more than 67%) and

0 otherwise.1 When stock options are significantly in the money, a CEO who holds on to the

option contract is considered to be highly confident about future stock performance. This

measure has been found to affect various managerial and financial decisions (e.g., Malmendier &

Tate, 2005, 2008; Galasso & Simcoe, 2011; Hirshleifer, Low, & Teoh, 2012; Deshmukh, Goel,

& Howe, 2013). We gathered the CEO option information from the ExecutiveComp database.

Because CEO compensation information is available for U.S. firms only, we tested Hypothesis 3

on a subsample of U.S. international acquisitions.

Control Variables

We controlled for several plausible explanations for acquiring firms’ foreign equity

ownership structure. First, the transaction cost perspective contends that firms acquire greater

ownership levels to counter opportunistic partners (Brouthers & Hennart, 2007; Chang &

Rosenzweig, 2001). Opportunism increases with high asset specificity and when investments

occur in uncertain environments. In line with other studies (e.g., Delios & Beamish, 1999; Mani,

Antia, & Rindfleisch, 2007), we used R&D intensity to measure asset specificity, which is the

R&D expense divided by the total revenue of the acquiring firm in the latest fiscal year-end

before the focal acquisition. To account for environmental uncertainty, researchers commonly

use the cultural distance between the home and host country (Erramilli & Rao, 1993; Luo, 2001;

Padmanabhan & Cho, 1996). We accordingly adopted Hofstede’s (1980) four cultural

dimensions (individualism, uncertainty avoidance, power distance, and masculinity), but we

followed Kogut and Singh’s (1988) method and combined them into one composite variable.


Second, parent firms’ international experience provides them with capabilities that should

influence their foreign equity ownership decisions (Delios & Beamish, 1999; Delios & Henisz,

2000). We controlled for three types of international experience: number of international

acquisitions, international joint ventures, and international alliances entered into by the

acquiring firms in the five years before the focal acquisition.

Third, researchers have used real options to explain acquiring firms’ foreign equity

ownership structure (Chari & Chang, 2009; Folta, 1998). We included several variables to

control for real options. We measured target industry uncertainty by differentiating high-tech

from non–high-tech industries. Using Loughran and Ritter’s (2000) definition of high-tech

industries, our high-tech variable equals 1 if the target industry falls in the high-tech industry

group and 0 otherwise. We also followed Beckman, Haunschild and Phillips (2004) and used the

average stock price volatility as another measure of industry uncertainty. Interest rates and

foreign exchange rates also affect real options, because they determine the present value of the

exercise price. We calculated the country-level interest rate variable by collecting the interest

rate of the target country for each sample year from the World Development Indicator database.

To calculate the effect of the foreign exchange rate, we noted the exchange rate of both

acquiring and target countries in each sample year, then calculated the percentage change in the

relative exchange rate between them from the beginning to the end of that year. A positive value

means that the acquiring country’s currency appreciated against the target country’s currency in

that year. In the regression model, we included the prior year’s interest rate and exchange rate

measures.2

Fourth, scholars have adopted institutional theory to explain foreign ownership structure.

We controlled for a bandwagon effect that could encourage a certain entry mode strategy (Henisz


& Delios, 2001; Xia, Tan, & Tan, 2008). We used a measure similar to Xia et al.’s (2008) and

calculated the average foreign equity acquired in the host country industry during the year before

the year of the focal deal. In addition to signaling any bandwagon effect, this variable controls

for a general institutional effect on foreign ownership levels, including different regulatory

restrictions on foreign ownership structures across countries and industries. An M&A wave in

the host country also could cause a bandwagon effect. To control for this market wave effect, we

include elapsed time, which equals the number of days between the focal acquisition and the

previous acquisition in the target country and industry. We also counted the number of

international acquisitions in the target country and industry in the past 12 months. Many

acquisitions in a short period signal a peak in an M&A wave, so we controlled for this market

sentiment effect.

Fifth, specific to international acquisitions, we controlled for the difficulty of evaluating

target firms, which might explain the foreign equity structure of acquiring firms (Chari & Chang,

2009; Chen & Hennart, 2004). Large transactions are more complex and involve more costly due

diligence than smaller transactions; therefore, we used transaction size to proxy for valuation

difficulty (Chari & Chang, 2009). We also controlled for private versus public target firms.

Private firms are not required to disclose information, and fewer analysts follow them, which

increases the difficulty of evaluating them.

In addition to these theoretical explanations, we controlled for important transaction

characteristics, such as tender offers, friendly versus hostile acquisitions, and payment method

(stock payment = 1, cash or mixed payment = 0). Finally, we noted the target-country GDP

growth rate, because rapidly growing countries provide more growth opportunities to

multinational firms and attract more foreign direct investment (Xia et al., 2008).


Analytical Approach

We used a conventional regression method to test our hypotheses. The dependent

variable (foreign ownership level) is bounded between 0.1% and 100%, so we used a Tobit

regression method that addresses censored data, similar to prior equity ownership studies (Chari

& Chang, 2009; Delios & Henisz, 2000; Malhotra & Gaur, 2014). Our sample covered multiple

countries and industries, so we also included acquirer-country and industry dummy variables in

the models. We controlled for year-specific variations in foreign ownership levels by

incorporating year dummies from 1990 to 2009 in the regression model. Finally, in line with

similar studies (Chari & Chang, 2009; Folta & Miller, 2002; Malhotra & Gaur, 2014), we

calculated clustered standard errors to account for multiple international acquisitions by the same

firm.

RESULTS

The total value of international acquisitions in our sample was US $2.37 trillion, an

economically significant value and a good representation of worldwide international acquisition

activity. Table 1 contains the descriptive statistics and correlations. The average ownership

acquired in an international acquisition deal was approximately 71.7%. All correlation

coefficients were less than .5, and the variance inflation factors in our models were below 2, so

multicollinearity is not a concern in the regression models.

--------------------------------------

Insert Table 1 about here

--------------------------------------

Table 2 contains the Tobit regression results. Model 1 includes the control variables only,

and Model 2 adds the key explanatory variable. In Hypothesis 1, we predicted a positive

relationship between the focal equity level and the local market’s previous international

acquisition equity level. As Model 2 in Table 2 shows, the regression coefficient for the previous


equity level (anchor) was significantly positive (p < .01), which supports Hypothesis 1. A one

standard deviation change in the previous equity value affects the focal ownership acquired by

about 3.2%, which translates to $35.2 million for an average target firm in our sample (valued at

approximately $1.1 billion). We also tested for anchoring using a hedonic regression method, as

reported in the supplementary analyses section below.

Furthermore, Hypothesis 2a predicted a stronger relationship between the previous and

focal international acquisition equity levels if the acquisition occurred in a different industry.

According to Model 3, the regression coefficient for the interaction term between an unrelated

industry and equity level was significantly positive (p < .01), which supports Hypothesis 2a.

Model 4 further shows that the interaction effect between a target country’s political stability and

previous equity level was significantly negative (p < .05), which supports Hypothesis 2b, such

that the anchoring effect was stronger in less politically stable target countries.3 For Hypothesis

3, about overconfident CEOs, we ran our analyses on the subsample of U.S. international

acquisitions. In Model 6 of Table 2, we controlled for additional CEO and board-level variables

and uncovered a significantly negative coefficient for the interaction effect between CEO

overconfidence and the previous international acquisition equity level (p < .05), which supports

Hypothesis 3.

--------------------------------------


--------------------------------------

To explain the interaction effects and their economic significance, we followed Aiken

and West (1991) and Dawson (2014) and used standardized regression coefficients to plot the

two-way interaction graphs. More specifically, we used one standard deviation below or above

the sample mean value to define the high or low value of previous equity level. We plotted the


changes in the predicted value of focal acquisition ownership acquired for low to high values of

previous equity levels across different moderators. Figure 1A shows the moderating impact of

industry unrelatedness. We found that a change in the previous equity level from low to high

(i.e., from –1sd to +1sd) increases the focal acquisition ownership acquired by 8% (from 71% to

79%) for related industry acquisitions and by 25% (from 38% to 63%) for unrelated industry

acquisitions. Prior equity level has a stronger impact (more than triple) on focal equity level in

unrelated industry acquisitions, further supporting Hypothesis 2a.

Figure 1B shows the moderating impact of political stability in the target country. The

figure suggests that a change in the previous equity level from low to high increases the focal

acquisition ownership acquired by 15% (from 67% to 82%) for acquisitions in politically stable

countries and by 25% (i.e., from 55% to 80%) for acquisitions in politically unstable countries.

Prior equity level has a stronger impact (almost 1.67 times) on focal equity level in acquisitions

in politically unstable countries, further supporting Hypothesis 2b.

Finally, Figure 1C shows the moderating impact of CEO overconfidence. We found that

a change in the previous equity level from low to high increases the focal acquisition ownership

acquired by 4% (from 92% to 96%) for overconfident CEOs and by 33% (from 64% to 97%) for

non–overconfident CEOs. This is more than an eight–fold increase, further supporting

Hypothesis 3.

--------------------------------------

Insert Figure 1A, 1B, and 1C about here

--------------------------------------

Supplementary Analyses

Our main results using Tobit regressions support our hypotheses. However, the positive

correlation between the previous and the focal international equity ownership levels may also be

because previous deals vicariously provide foreign acquirers with relevant insights, such as the


quality of target firms in a given industry. There is no direct measure for vicarious learning, but

this omitted variable could bias our inferences (Reeb, Sakakibara, & Mahmood, 2012).

Therefore, we used an identification strategy to separate this vicarious influence from anchoring

behavior.

Accordingly, we adopted an accepted methodology from the economics literature,

developed by Genesove and Mayer (2001) and Beggs and Graddy (2009) and based on a hedonic

regression approach. Specifically, we identified the key determinants of the international equity

ownership decision (i.e., the previously described control variables). We then regressed the

international equity ownership level of both the focal and previous international acquisition deals

on these control variables. (To perform this regression, we also collected data for the control

variables that related to the previous deal.) With this information, we predicted values for both

the focal and previous international equity ownership levels, using a first-step hedonic regression

model,

𝑅𝑡 = 𝑋𝑡𝛽𝑡, (1)

where 𝑅𝑡 is the predicted focal international equity ownership level, a function of the time t

observable characteristics 𝑋𝑡 (i.e., control variables to explain the focal deal ownership), and

𝑅𝑡−1 = 𝑋𝑡−1𝛽𝑡−1, (2)

where 𝑅𝑡−1 is the predicted previous international equity ownership level, a function of the

preceding deal’s observable characteristics 𝑋𝑡−1 (i.e., control variables to explain the previous

deal ownership).

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

𝑌𝑡 = 𝜂 ∙ 𝑅𝑡 + 𝜃 ∙ (𝑌𝑡−1 − 𝑅𝑡−1) + 𝛿 ∙ (𝑌𝑡−1 − 𝑅𝑡) + 휀𝑡, (3)


where 𝑌𝑡 is the actual focal international equity ownership level purchased by a foreign-based

acquirer in a given target country and industry; 𝑌𝑡−1 is the actual previous international equity

ownership level purchased by another foreign-based acquirer in the same target country and

industry; and 휀𝑡 is the error term. In Equation 3, 𝜂 captures the effect of the predicted focal

international equity ownership level (𝑅𝑡) on the actual focal international equity ownership level;

𝑌𝑡−1 − 𝑅𝑡−1 captures the deviation of the previous international equity ownership level from the

past prediction of what that level should be; 𝜃 captures the effect of the stable, but unobserved or

hard-to-measure characteristics of M&A deals in a given foreign country and industry.4

The variable 𝑌𝑡−1 − 𝑅𝑡 is our main focus, and the coefficient 𝛿 captures the anchoring

effect we intend to estimate. That is, 𝑌𝑡−1 − 𝑅𝑡 captures the deviation of the previous

international equity ownership level from the current prediction of what the actual focal

international equity ownership level should be. If foreign-based acquiring firms engage in

anchoring, we expect that their decision to purchase a certain level of equity ownership in target

firms in a given foreign country and industry will be strongly influenced by the previous equity

ownership level purchased by other foreign-based acquirers in the same target country and

industry. This level should be systematically different from what we objectively expect the focal

international equity ownership level to be. Our baseline “no anchoring effect” null hypothesis is

consistent with 𝛿 = 0. Intuitively, this hypothesis implies that the previous international equity

ownership level does not systematically deviate from our most informed guess of what the actual

focal international equity ownership level should be.5 Therefore, it has no significant effect on

the focal international equity ownership level when compared with a level that is justified by a

fundamental analysis (predictive model). Contrary to the baseline hypothesis, if 𝛿 is statistically

significant and positive, acquirers engage in anchoring when making international equity


ownership decisions. The previous international equity ownership levels not only systematically

deviate from reasonable expectations of what the acquirer’s focal international equity ownership

levels should be but also exert significant, potentially unwarranted influences on the acquirer’s

actual international equity ownership decisions.

Models 1 and 2 in Table 3 estimate the hedonic regressions for the previous acquisition in

the target industry (the anchor) and the focal acquisition in the target industry, respectively.

--------------------------------------


--------------------------------------

Using the predicted values for both the focal and previous international equity ownership levels,

we estimated the anchoring regression model in Table 4. To assess the comparable size of the

regression coefficients, we standardized all the variables. As Table 4 shows, the coefficient of

the predicted focal international equity level (𝜂 in Equation 3) has a significantly positive effect

on the actual focal international equity level, so our control model is a good predictor of the

international acquisition equity ownership level. The regression coefficient for the deviation of

the previous international equity ownership level from its predicted level also is positive and

significant (𝜃 in Equation 3); hence, the relatively stable but unobservable or hard-to-measure

characteristics of preceding international deals affect the focal international equity ownership

decisions.

The coefficient for the anchoring effect (𝛿 in Equation 3) is significantly positive (p <

.01), and the standardized regression coefficient for this anchoring effect (.13) is twice that for

the relevant information (.05). In terms of the economic significance of the anchoring effect, a

one-standard-deviation difference between the market’s previous international equity ownership

level and the predicted focal international equity ownership level causes the anchor (i.e., the

previous international equity ownership level) to pull the actual focal international equity


ownership level to itself by nearly 13.3% of the standard deviation of ownership acquired in the

focal acquisition. The standard deviation of the focal international equity ownership level is

approximately 37%, so the effect of anchoring is approximately 4.9%. In our sample, the average

market capitalization of the target firms was approximately US $1.1 billion. Anchoring would

affect the average transaction value of an international acquisition by US $54 million. Our results

also remained robust to other variations, as summarized in the footnote to Table 4.

--------------------------------------


--------------------------------------

Tests for Alternative Explanation

One alternative explanation for our results could be institutional isomorphism (DiMaggio

& Powell, 1983; Lieberman & Asaba, 2006), in which acquiring firms imitate the equity stakes

previously purchased by others to enhance their performance or bolster their legitimacy in the

local market. Deliberative and sociological processes underscore institutional isomorphism. We

expect managers who engage in mimetic behavior to search for firms or practices worth

imitating. Organizations can bolster their survivability in uncertain markets by mimicking

policies or practices that are perceived as legitimate. To separate our anchoring perspective from

this institutional isomorphism perspective, we investigated whether anchoring effects persist,

even when acquisition behavior falls short of legitimacy, and are thus potentially

disadvantageous to an imitator.

Specifically, we considered hostile takeovers. When bidding firms make hostile offers,

they circumvent top management and directly approach the shareholders. Hostile takeovers

usually are a last resort (Gaughan, 2011). They spark resistance from top management (Gaughan,

2011; Schneper & Guillén, 2004) and workers (Schneper & Guillén, 2004). In international

acquisitions, top managers of foreign target firms might lobby the host government to intervene.


For example, during Mittal Steel’s hostile bid for France’s Arcelor, public opposition spread to

then-President Jacques Chirac. Thus, by virtue of their unwelcome nature, hostile offers are

unlikely to attract imitators. If anchoring effects capture legitimacy-seeking mimetic behavior,

they should not arise in the case of hostile offers.

To test this, we ran our analyses on a subsample of international acquisitions in which the

previous international acquisition in the local market was a hostile offer. We considered two

measures: unfriendly deals and tender offers, which we collected from the Securities Data

Corporation Platinum database. Most hostile acquisitions occur through tender offers (Browne &

Rosengren, 1987; Gaughan, 2011). According to Models 1 and 2 in Table 5, a significantly

positive relationship exists between previous and focal international acquisition equity levels for

prior tender offers (p < .01) and unfriendly deals (p < .05). Thus, an anchoring effect is present

even when the previous acquisition was hostile.

--------------------------------------


--------------------------------------

Similarly, acquiring firms that seek to imitate legitimate behavior should be reluctant to

imitate other firms that make unsuccessful international acquisition bids, because such failure

might emanate from the bidder’s departure from business norms and values. Furthermore,

considering the potential decline in social support for a failed foreign bidder in local markets

(Ahlstrom & Bruton, 2001; Bianchi & Ostale, 2006), other aspiring bidders may avoid practices

that mimic those of the failed party. In line with institutional isomorphic reasoning, if a prior

international acquisition bid was not perceived as successful, the focal acquirer has little reason

to mimic its expressed equity ownership interest. To assess whether the previous international

acquisition was successful, we used a short-term event study methodology and collected the


daily stock price of the prior acquiring firm around the deal announcement period from

DataStream. We also collected the corresponding stock market index for the same period.

Similar to Brown and Warner (1985), we used standard market-adjusted models to calculate

daily abnormal stock returns around the acquisition announcement date for each acquiring firm.

That is, we focused on the event window t – 1 to t + 1 (one day before and one day after the

announcement date) and calculated the daily abnormal return as

𝐴𝑅𝑗,𝑡 = 𝑅𝑗,𝑡 − 𝑅𝑚,𝑡, (4)

where 𝐴𝑅𝑗,𝑡 was the daily abnormal return for firm j on day t; 𝑅𝑗,𝑡 was firm j’s daily stock return

on day t; and 𝑅𝑚,𝑡 represented the daily return of the local stock market index on day t. We then

added daily abnormal returns to measure the cumulative abnormal return (CAR) for acquiring

firm j in the three-day period (–1, +1) surrounding the acquisition announcement:

𝐶𝐴𝑅𝑗 = ∑ 𝐴𝑅𝑗,𝑡+1𝑡=−1 . (5)

An announced international acquisition deal is successful, from the perspective of stock

market investors and shareholders, if the CAR measure is positive, and it is unsuccessful if the

CAR measure is negative. Model 3 in Table 5 shows the results for our analyses of a sample of

unsuccessful international acquisitions. We still found a significantly positive relationship

between the previous and focal international acquisition equity levels (p < .01). That is, an

anchoring effect persists even when the previous acquisition was perceived as unsuccessful.

In line with the sociological foundation of the institutional isomorphism perspective,

social or business networks constitute potential channels through which firms may externally

acquire knowledge (DiMaggio & Powell, 1983). Imitators with social or relational ties to leading

firms could have an advantage in terms of a better understanding of why and how leaders


achieve legitimacy or superior performance (Haunschild, 1993; Haunschild & Beckman, 1998;

Kostova & Roth, 2002). For example, prior research suggests that mimetic acquisition behavior

is especially prevalent among acquirers with network ties in the form of board interlocks

(Haunschild, 1993; Haunschild & Beckman, 1998). We tested whether our results hold if prior

and focal foreign acquirers are not part of a board interlock. As acquirers from different countries

are unlikely to be in the same interlocked board, we selected a subsample where both the focal

and prior foreign acquirers are from different home countries. The results (Model 4 in Table 5)

show a significantly positive relationship between the previous and the focal international

acquisition equity levels (p < .01).

Finally, it can be argued that legitimacy-seeking foreign firms would not mimic the

preceding acquisition equity level if it diverted from the industry nom. We measured the industry

norm as the average level of equity purchased in foreign target firms of a given country and

industry. If industry players tolerate deviations in equity purchases up to the average deviation

from the industry norm, then the institutional isomorphism perspective suggests that legitimacy-

seeking foreign acquirers should not imitate other foreign acquirers whose prior level of

ownership of foreign target firms in the same industry exceeds the average deviation from the

industry norm. Model 5 in Table 5 shows that, for a subsample of deals where the previous

equity level exceeded the average deviation, the relationship between prior and focal

international equity levels is significantly positive (p < .01). Overall, our critical tests show that

institutional isomorphism is not a likely explanation for our results.

DISCUSSION

We applied a behavioral framework to explain how top managers make international

equity ownership decisions. We focused on the anchoring heuristic and offer systematic evidence


that a local market’s previous international equity ownership level acts as an anchor in such

decisions. Furthermore, the tendency of top managers to engage in anchoring is particularly

strong when informational deficiencies are compounded by high levels of uncertainty, such as

when firms acquire foreign target firms in unrelated industries and when such target firms

operate in politically unstable environments. By conducting a comprehensive regression analysis

that incorporates the recently developed hedonic approach, we showed that anchoring leads

acquiring firms to purchase equity stakes in foreign target firms at levels that are systematically

different from what they would have been if these firms had relied instead on information from

objective or systematic analyses. However, acquiring firms engage less in anchoring when they

have an overconfident CEO.

Our study makes several contributions to different streams of research. First, we add to

extant literature on equity-based foreign entry mode decisions (Brouthers & Hennart, 2007;

Canabal & White, 2008). Previous research has focused on rational choice or normative

perspectives without systematically addressing the role of top managers’ cognition. Drawing on

theoretical insights from behavioral economics and behavioral strategy, we propose an anchoring

theory of international equity ownership decisions. We document new systematic evidence that

supports this anchoring mechanism; specifically, we show that top managers, such as CEOs,

could unconsciously draw on others’ most recent equity stake purchases in foreign target firms

when making their international equity ownership decisions. By providing evidence of the

influence of cognitively limited CEOs on equity-based foreign entry mode decisions, we go

beyond conventional determinants, such as transaction costs (Zhao et al., 2004), informational

asymmetry and uncertainty (Chari & Chang, 2009; Chen & Hennart, 2004; Chi, 1994), or the

institutional environment (e.g., Davis et al., 2000; Lu, 2002). Furthermore, the results extend


acquisition-related research on anchoring, in the context of premium decisions (Malhotra et al.,

2015), by providing a deeper understanding of how managerial cognition influences the

anchoring mechanism under uncertainty. Our study thus reinforces the point that managerial

cognition and heuristics warrant closer attention in integrated theoretical frameworks (Gavetti,

2012; Levinthal, 2011; Powell, Lovallo, & Fox, 2011).

Second, by providing robust empirical support for a behavioral interpretation of top

managers’ international equity ownership decisions, our study both verifies and complements

insights from case studies on the behavioral underpinnings of corporate strategy. For example, in

a case study of six international entrepreneurial firms, Bingham and Eisenhardt (2011) link the

development of firm-level capabilities to the refinement of heuristics that managers learn in

unpredictable markets. Another study that similarly focuses on an international acquisition

setting, documents a single-company case study that shows how the interplay of senior executive

expertise and higher-order heuristics produce rich, sophisticated, small-world representations of

unstable and complex social environments (Maitland & Sammartino, 2015). We do not

demonstrate explicitly how a given firm-level anchoring practice arises from the anchoring

practices of individual decision makers, but we recommend caution to avoid overstating the

challenge of translating the latter into the former (Eggers & Kaplan, 2013). Highly specialized

senior executives oftentimes evaluate, execute, and integrate acquisition deals (Rovit & Lemire,

2003). Given the potential for acquisition teams to share a core set of beliefs or mental models

that enable low-level managers to appreciate a certain approach to acquisition deals (Tyler &

Gnyawali, 2009), a single senior executive or small group of unified senior executives could

have considerable latitude over the firm’s anchoring practices.


Case studies offer important insights into the nature and consequences of heuristics;

however, they are subject to concerns about the extent to which the findings can be generalized.

Because we used a large sample for our quantitative analysis, there are relatively few concerns

about the external validity of our key results with respect to the use of the anchoring heuristic. In

particular, we found that uncertainty, whether caused by international acquisitions in unrelated

industries or politically unstable environments, encourages senior executives to unintentionally

resort to heuristics, such as anchoring. This finding supports similar findings by Maitland and

Sammartino (2015).

Beyond verifying previous case evidence, our study provides a basis for evaluating the

suitability and efficacy of heuristics in a particular business context. Anchoring can distort an

acquiring firm’s international equity ownership decisions if a substantial mismatch arises

between the structural characteristics of the past international acquisition deal (i.e., the anchor)

and the current deal. In turn, there is considerable room for improvement in analyses of

comparable international deals, and in the selection and adjustment of anchors, such as the role

of judgment expertise (Maitland & Sammartino, 2015). Acquiring firm CEOs should try to attain

the international acquisition expertise needed to identify anchors and adjust for differences

appropriately (Gary, Wood, & Pillinger, 2012; Lovallo, Clarke, & Camerer, 2012).

The presence of overconfident CEOs in acquiring firms is associated with weaker

anchoring effects. The potential for cognitive attributes to inhibit rather than enable the use of

heuristics is an interesting observation, because behavioral theorists usually appeal to cognitive

factors to justify the use of heuristics (Tversky & Kahneman, 1974; Simon, 1955). Observed

differences in the use of heuristics and the extent of executives’ cognitive sophistication cannot


be explained solely by differences in the level of expertise. Overconfidence among senior

executives also must be considered.

These findings have important implications for managers and practitioners. Due to the

constraints top managers face in collecting reliable information and making analytically rigorous

evaluations of foreign target firms (Hitt & Tyler, 1991), they may gravitate toward anchors when

making investment decisions (Garbuio, King, & Lovallo, 2011), especially if those top managers

want to acquire a firm immediately to gain access to key resources (Ransbotham & Mitra, 2010).

However, senior executives engaged in anchoring may overemphasize information about

previous international equity ownership structures and ignore other important, deal-specific

information. Therefore, they should carefully consider the influence of anchoring on their

international acquisition decisions. Although it is difficult to break from anchoring in practice

(Wilson et al., 1996), forming more diverse acquisition teams and establishing various checks in

the decision-making process may help reduce an overreliance on heuristics.

Our study has several limitations that offer opportunities for research. We found that a

previous international acquisition influences a focal international deal’s equity ownership level

but did not provide detailed insights into how previous equity-level decisions influence decision

makers. Also, although our results and additional tests showed strong support for our anchoring

theory, we acknowledge that we cannot explicitly determine whether managers’ decisions are

deliberate or unintentional. Further research could provide richer insights through a qualitative

design that includes interviews with key executives, although such qualitative research may be

difficult, because acquisition decisions usually are made in secret.

We focused on how higher levels of uncertainty can increase anchoring. However, other

factors, such as the level of acquisition experience among acquiring firm executives, also can


influence the use of heuristics. Anchoring studies have found mixed results on the effects of

experience (Furnham & Boo, 2011). Future research could explore whether managers with more

acquisition experience use anchors less because they are less constrained by uncertainty, or

whether they anchor on an internal anchor (originating from their previous acquisitions) rather

than an external anchor.

Finally, the hedonic regression technique explicitly recognizes that previous equity-stake

purchases may contain useful information about relatively stable but unobserved international

M&A deal characteristics. Top managers may intentionally learn about such characteristics by

thoughtfully incorporating the previous equity stakes purchased by others in their own decision-

making process. By offering a way to disentangle this external learning opportunity from a

psychologically driven one, such as anchoring, the hedonic regression approach lends itself to a

potentially broad set of applications in strategic management research. For example, it could be

specifically applied in organizational learning research. Building on the longstanding view that

people’s performance improves as they accumulate experience (e.g., Argote, Beckman, & Epple,

1990), researchers have increasingly focused on the possibility of learning from the experience

of others (e.g., Shaver, Mitchell, & Yeung, 1997). The hedonic regression approach could clarify

this theoretical insight, because it facilitates a direct test of whether such an external learning

process is as thoughtful and meaningful as suggested or merely an unintentional outcome of

psychological processes.

CONCLUSION

When considering how much equity to purchase in foreign target firms, conventional

approaches suggest that managers objectively evaluate the risks and costs of their international

equity ownership decisions under uncertainty and informational deficiencies. Conventional,


rational-choice frameworks offer some important theoretical and practical insights, but there is

more to the story. We emphasize the formidable challenges that acute information deficiencies

pose for time-constrained and cognitively constrained executives, and we explore less

cognitively sophisticated approaches to international equity ownership decisions. In particular,

we show that top managers, such as CEOs (and particularly less self-confident ones), engage in

anchoring when confronted with such decisions. Whereas anchoring practices may help

executives to cope with uncertainty under time pressure, some anchors may be less appropriate,

because they are based on deals that could differ fundamentally from the focal international deal.

Therefore, it remains important to find effective ways to assess and manage the drawbacks

associated with anchoring.


NOTES

1. We determined the cutoff of 67% by calibrating a detailed dataset of CEO stock option

holdings and exercise decisions. This measure assumes that risk-averse CEOs hold

undiversified portfolios (due to incentive plans of equity compensation) and exercise options

early if they are rational.

2. In light of the option-like advantages associated with partial acquisitions, we also tested our

results for a subsample of majority acquisitions (equity purchased >50% and >95%). Our

results remained qualitatively the same.

3. In unreported statistical analyses, we replaced the World Bank’s political stability measure

with Henisz’s (2000a) political hazard measure. The latter did not yield statistically

significant estimates. This measure may not be suitable for testing our anchoring theory for

theoretical and empirical reasons. In particular, Henisz (2000a, 2000b) is concerned about

multinational firms’ exposure to appropriation risk in politically unconstrained host

countries. However, we are focused on the potentially acute strain that a politically volatile

environment might impose on top managers’ limited cognitive resources (Maitland &

Sammartino, 2015). Additionally, a correlation analysis between Henisz’s political hazard

measure and the political instability measure used in our analysis is less than 0.5; hence, it is

inappropriate to treat both measures as substitutes.

4. Some unobserved characteristics of M&A deals in a given foreign country and industry could

be time-varying, so we assume that temporal changes in such unobserved characteristics are

not substantial between the focal and previous acquisitions.

5. On a technical note, the “no anchoring effect” null hypothesis (δ=0) is effectively obtained if,

on average, 𝑌𝑡−1 = 𝑅𝑡 or 𝑌𝑡−1 − 𝑅𝑡 = 0 (i.e., if the anchoring term drops out of Equation 3).


REFERENCES

Ahlstrom, D., & Bruton, G. D. 2001. Learning from successful local private firms in China:

Establishing legitimacy. Academy of Management Executive, 15: 72-83.

Aiken, L. S., & West, S. G. 1991. Multiple regression: Testing and interpreting interactions.

Newbury Park, London, Sage.

Altman, M. 2004. The Nobel Prize in behavioral and experimental economics: A contextual and

critical appraisal of the contributions of Daniel Kahneman and Cernon Smith. Review of

Political Economy, 16: 3-41.

Anand, J., & Delios, A. 2002. Absolute and relative resources as determinants of international

acquisitions. Strategic Management Journal, 23: 119–134.

Anderson, E., & Gatignon, H. 1986. Models of foreign entry: A transaction cost analysis and

propositions. Journal of International Business Studies, 17: 1–26.

Argote, L., Beckman, S., & Epple, D. 1990. The persistence and transfer of learning in industrial

settings. Management Science, 36: 140-154.

Baker, M., Pan, X. & Wurgler, J. 2012. The effect of reference point prices on mergers and

acquisitions. Journal of Financial Economics, 106: 49-71.

Barkema, H. G., & Vermeulen, F. 1998. International expansion through start-up or acquisition:

A learning perspective. Academy of Management Journal, 41: 7-26.

Bahník, Š., & Strack, F. 2016. Overlap of accessible information undermines the anchoring

effect. Judgment and Decision Making, 11: 92-98.

Beckman, C. M., Haunschild, P. R., & Phillips, D. J. 2004. Friends or strangers? Firm-specific

uncertainty, market Uncertainty, and network partner selection. Organization Science,

15: 259-275.

Beggs, A., & Graddy, K. 2009. Anchoring effects: Evidence from art auctions. American

Economic Review, 99: 1027–1039.

Bianchi, C. C., & Ostale, E. 2006. Lessons learned from unsuccessful internationalization

attempts: Example of multinational retailers in Chile. Journal of Business Research, 59:

140-147.

Bingham, C. B., & Eisenhardt, K. M. 2011. Rational heuristics: The “simple rules” that

strategists learn from process experience. Strategic Management Journal, 32: 1437–1464.

Bloomberg, 2011. Global Legal Advisory Mergers & Acquisitions Q3 Rankings. Accessed on

January 2012 from http://about.bloomberg.com/pdf/manda.pdf.

Brouthers, K. D., & Brouthers, L. E. 2003. Why service and manufacturing entry mode choices

differ: The influence of transaction cost factors, risk and trust. Journal of Management

Studies, 40: 1179–1204.

Brouthers, K. D., & Hennart, J. -F. 2007. Boundaries of the firm: Insights from international

entry mode research. Journal of International Business Studies, 33: 395–425.

Brown, S. J., & Warner, J. B. 1985. Using daily stock returns: The case of event studies. Journal

of Financial Economics, 14: 3-31.

Browne, L. E., & Rosengren, E. S. 1987. Are hostile takeovers different?. In L. E. Browne & E.

S. Rosengren (Eds.), The Merger Boom: 199-229. New Hampshire, Boston: Federal Bank

of Boston.

Cain, D. M., Moore, D. A., & Haran, U. 2015. Making sense of overconfidence in market entry.

Strategic Management Journal, 36: 1–18.

Campbell, T. C., Gallmeyer, M., Johnson, S. A., Rutherford, J., & Stanley, B. W. 2011. CEO

optimism and forced turnover. Journal of Financial Economics, 101: 695-712.

http://about.bloomberg.com/pdf/manda.pdf


Canabal, A., & White, G. O. 2008. Entry mode research: Past and future. International Business

Review, 17: 267–284.

Carpenter, M. A., Geletkanycz, M.A., & Sanders, W. G. 2004. Upper echelons research

revisited: Antecedents, elements, and consequences of top management team

composition. Journal of Management, 30: 749–778.

Chan, C. M., Makino, S., & Isobe, T. 2006. Interdependent behavior in foreign direct investment:

The multi-level effects of prior entry and prior exit on foreign market entry. Journal of

International Business Studies, 37: 642-665.

Chang, S. J., & Rosenzweig, P. M. 2001. The choice of entry mode in sequential foreign direct

investment. Strategic Management Journal, 22: 747–776.

Chari, M. D. R., & Chang, K. 2009. Determinants of the share of equity sought in cross-border

acquisitions. Journal of International Business Studies, 40: 1277–1297.

Chen, H., & Hu, M. Y. 2002. An analysis of determinants of entry mode and its impact on

performance. International Business Review, 11. 193–210.

Chen, S. -F. 2008. The motives for international acquisitions: Capability procurements, strategic

considerations, and the role of ownership structures. Journal of International Business

Studies, 39: 454–471

Chen, S. -F., & Hennart, J. -F. 2004. A hostage theory of joint ventures: Why do Japanese

investors choose partial over full acquisitions to enter the United States? Journal of

Business Research, 57: 1126–1134.

Chi, T. 1994. Trading in strategic resources: Necessary conditions, transaction cost problems,

and choice of exchange structure. Strategic Management Journal, 15: 271-290.

Cho, K. R., & Padmanabhan, P. 2005. Revisiting the role of cultural distance in MNC's foreign

ownership mode choice: the moderating effect of experience attributes. International

Business Review, 14: 307-324.

Christensen, D. M., Dhaliwal, D. S., Boivie, S., & Graffin, S. D. 2015. Top management

conservatism and corporate risk strategies: Evidence from managers’ personal political

orientation and corporate tax avoidance. Strategic Management Journal, 36: 1918–1938.

Davis, P. S., Desai, A. B., & Francis, J. D. 2000. Mode of international entry: An isomorphism

perspective. Journal of International Business Studies, 31: 239-258.

Dawson, J. F. 2014. Moderation in management research: What, why, when and how. Journal of

Business and Psychology, 29: 1-19.

Delios, A., & Beamish, P. W. 1999. Geographic scope, product diversification and the corporate

performance of Japanese firms. Strategic Management Journal, 20: 711-728.

Delios, A., & Henisz, W. J. 2000. Japanese firms' investment strategies in emerging eonomies.

Academy of Management Journal, 43: 305–323.

Deshmukh, S., Goel, A. M., & Howe, K. M. 2013. CEO overconfidence and dividend policy.

Journal of Financial Intermediation, 22: 440–463.

Dhanaraj, C., & Beamish, P. W. 2004. Effect of equity ownership on the survival of international

joint ventures. Strategic Management Journal, 25: 295–305.

DiMaggio, P. J., & Powell, W. W. 1983. The iron cage revisited: Institutional isomorphism and

collective rationality in organizational. American Sociological Review, 48: 147-160.

Duhaime, I. M., & Schwenk, C. R. 1985. Conjectures on cognitive simplification in acquisition

and divestment decision making. Academy of Management Review, 10: 287-295.

Dunning, D., Griffin, D. W., Milojkovic, J. D., & Ross, L. 1990. The overconfidence effect in

social prediction. Journal of Personality and Social Psychology, 58: 568-581.


Eggers, J. P., & Kaplan, S. 2013. Cognition and capabilities: A multi-level perspective. Academy

of Management Journal, 7: 293-338.

Epley, N. 2004. A tale of tuned decks? Anchoring as adjustment and anchoring as activation. In

D.J. Koehler & N. Harvey (Eds.), The Blackwell handbook of judgment and decision

making: 240–256. Oxford, England: Blackwell.

Epley, N., & Giolvich, T. 2006. The anchoring-and-adjustment heuristic: Why the adjustments

are insufficient. Psychological Science, 17: 311-318.

Erramilli, M. K., & Rao, C. P. 1993. Service firms’ international entry-mode choice: A modified

transaction-cost analysis approach. Journal of Marketing, 57: 19–38.

Fiegenbaum, A., & Thomas, H. 1995. Strategic groups as reference groups: Theory, modeling

and empirical examination of industry and competitive strategy. Strategic Management

Journal, 16: 461–476.

Folta, T. B. 1998. Governance and uncertainty: The tradeoff between administrative control and

commitment. Strategic Management Journal, 19: 1007–1028.

Folta, T. B., & Miller, K. D. 2002. Real options in equity partnerships. Strategic Management

Journal, 23: 77–88.

Fuller, K., Netter, J., & Stegemoller, M. 2002. What do returns to acquiring firms tell us?

Evidence from firms that make many acquisitions. Journal of Finance, 57: 1763–1794.

Furnham, A., & Boo, H. C. 2011. A literature review of the anchoring effect. Journal of Socio-

Economics, 40: 35-42.

Galasso, A., & Simcoe, T. S. 2011. CEO overconfidence and innovation. Management Science,

57: 1469 – 1484.

Garbuio, M. King, A.W., & Lovallo, D. 2011. Looking inside: Psychological influences on

structuring a firm's portfolio of resources. Journal of Management, 37: 1444-1463.

Gary, M. S., & Wood, R. R. 2011. Mental models, decision rules, and performance

heterogeneity. Strategic Management Journal, 32: 569–594.

Gary, M. S., Wood, R. E., & Pillinger, T. 2012. Enhancing mental models, analogical transfer,

and performance in strategic decision making. Strategic Management Journal, 33: 1229-

1246.

Gatignon, H., & Anderson, E. 1988. The multinational corporation’s degree of control over

foreign subsidiaries: An empirical test of a transaction cost explanation. Journal of Law,

Economics, and Organization, 4: 305–336.

Gaughan, P. A. 2011. Mergers, acquisitions, and corporate restructurings (5th ed.). Hoboken,

NJ: John Wiley & Sons.

Gavetti, G. 2012. Toward a behavioral theory of strategy. Organization Science, 23: 267-285.

Gavetti, G., & Levinthal, D. A. 2000. Looking forward and looking backward: Cognitive and

experiential search. Administrative Science Quarterly, 45: 113-137.

Genesove, D., & Mayer, C. 2001. Loss aversion and seller behavior: Evidence from the housing

market. Quarterly Journal of Economics, 116: 1233-1260.

Gigerenzer, G., & Gaissmaier, W. 2011. Heuristic decision making. Annual Review of

Psychology, 62: 451–482.

Gigerenzer, G., & Goldstein, D. G. 1996. Reasoning the fast and frugal way: Models of bounded

rationality. Psychological Review, 103: 650-669.

Haley, U. C. V., & Stumpf, S. A. 1989. Cognitive trails in strategic decision-making: linking

theories of personalities and cognitions. Journal of Management Studies, 26: 477–497.


Hambrick, D. C., & Mason, P. A. 1984. Upper echelons: The organization as a reflection of its

top managers. Academy of Management Review, 9: 193-206.

Hammond, J. S., Keeney, R. L., & Raiffa, H. 1998. The hidden traps in decision making.

Harvard Business Review, 16: 47–58.

Haspeslagh, P., & Jemison, D. B. 1991. Managing acquisitions: Creating value through

corporate renewal. New York: Free Press.

Haunschild, P. R.. 1993. Interorganizational imitation: The impact of interlocks on corporate

acquisition activity. Administrative Science Quarterly, 38: 564-592.

Haunschild, P. R., & Beckman, C. M. 1998. When do interlocks matter?: Alternate sources of

information and interlock influence. Administrative Science Quarterly, 43: 815-844.

Haunschild, P. R., & Miner, A. S. 1997. Modes of interorganizational imitations: The effects of

outcome salience and uncertainty. Administrative Science Quarterly, 42: 472-500.

Hayward, M. L. A., & Hambrick, D. C. 1997. Explaining the premiums paid for large

acquisitions: Evidence of CEO hubris. Administrative Science Quarterly, 42: 103–127.

Hennart, J. –F., & Park, Y. –R. 1993. Greenfield vs. acquisition: The strategy of Japanese

investors in the United States. Management Science, 39: 1054-1070.

Henisz, W. J. 2000a. The institutional environment for multinational investment. Journal of Law,

Economics, and Organization, 16: 334–364.

Henisz, W. J. 2000b. The institutional Environment for economic growth. Economics and

Politics, 12: 1-31.

Henisz, W. J., & Delios, A. 2001. Uncertainty, imitation and plan location: Japanese

multinational corporations. Administrative Science Quarterly, 46: 443–475.

Herrmann, P., & Datta, D. K. 2006. CEO experiences: Effects on the choice of FDI entry mode.

Journal of Management Studies, 43: 755–778.

Hiller, N. J., & Hambrick, D. C. 2005. Conceptualizing executive hubris: the role of (hyper-)core

self-evaluations in strategic decision-making. Strategic Management Journal, 26: 297–

319.

Hirshleifer, D., Low, A., & Teoh, H., S. 2012. Are overconfident CEOs better innovators?

Journal of Finance, 66: 1457-1498.

Hitt, M. A., & Tyler, B. B. 1991. Strategic decision models: Integrating different perspectives.

Strategic Management Journal, 12: 327-351.

Hodgkinson, G. P. & Healey, M. P. 2008. Cognition in organizations. Annual Review of


Hofstede, G. 1980. Culture’s consequences: International differences in work-related values.

Beverly Hills, CA: Sage.

Huff, A. S. 1982. Industry influences on strategy reformulation. Strategic Management Journal,

3: 119–131.

Kahneman, D. 2011. Thinking, fast and slow. London: Macmillan.

Kaplan, S. 2011. Research in cognition and strategy: Reflections on two decades of progress and

a look to the future. Journal of Management Studies, 48: 665-695.

Kogut, B., & Singh, H. 1988. The effect of national culture on the choice of entry mode. Journal

of international business studies, 19: 411-432.

Kostova, T., & Roth, K. 2002. Adoption of an organizational practice by subsidiaries of

multinational corporations: Institutional and relational effects. Academy of Management

Journal, 45: 215-233.


Levinthal, D. 2011. A behavioral approach to strategy—What’s the alternative? Strategic

Management Journal, 32: 1517-1523.

Levinthal, D., & March, J. 1993. The myopia of learning. Strategic Management Journal, 14:

95-112.

Lieberman, M. B., & Asaba, S. 2006. Why do firms imitate each other? Academy of

Management Review, 31: 366–385.

Loughran, T., & Ritter, J. 2000. Uniformly least powerful tests of market efficiency. Journal of

Financial Economics, 55: 361–389.

Lovallo, D., Clarke, C., & Camerer C. 2012. Robust analogizing and the outside view: two

empirical tests of case-based decision making. Strategic Management Journal, 33: 496–

512.

Lu, J. W. 2002. Intra- and inter-organizational imitative behavior: Institutional influences on

Japanese firms’ entry mode choice. Journal of International Business Studies, 33: 19–37.

Luo, Y. 2001. Capability exploitation and building in a foreign market: Implications for

multinational enterprises. Organization Science, 13: 48–63.

Maitland, E., & Sammartino, A. 2015. Decision-making and uncertainty: The role of heuristics

and experience in assessing a politically hazardous environment. Strategic Management

Journal, 36: 1554–1578.

Malhotra, S., & Gaur, A. 2014. Spatial geography and control in foreign acquisitions. Journal of

International Business Studies, 45: 191-210.

Malhotra, S., Sivakumar, K., & Zhu, P. 2011. A comparative analysis of the role of national

culture on foreign market acquisitions by U.S. firms and firms from emerging countries.

Journal of Business Research, 64: 714-722.

Malhotra, S., Zhu, P., & Reus, T. 2015. Anchoring on the acquisition premium decisions of

others. Strategic Management Journal, 36: 1866–1876.

Malmendier, U. & Tate, G. 2005. CEO overconfidence and corporate investment. Journal of

Finance, 60: 2661–2700.

Malmendier, U. & Tate, G. 2008. Who makes acquisitions? CEO overconfidence and the

market’s reaction. Journal of Financial Economics, 89: 20-43.

Mani, S., Antia, K. D., & Rindfleisch, A. 2007. Entry mode and equity level: A multilevel

examination of foreign direct investment ownership structure. Strategic Management

Journal, 28: 857–866.

Marcel, J. J., Barr, P. S., & Duhaime, I. M. 2011. The influence of executive cognition on

competitive dynamics. Strategic Management Journal, 32: 115–138.

March, R. 2006. Rationality, foolishness, and adaptive intelligence. Strategic Management

Journal, 27: 201–214.

Massini, S., Lewin, A. Y., & Greve, H. R. 2005. Innovators and imitators: Organizational

reference groups and adoption of organizational routines. Research Policy, 34: 1550–

1569.

Moeller, S. B., Schlingemann, F. P., & Stulz, R. M. 2005. Wealth destruction on a massive

scale? a study of acquiring-firm returns in the recent merger wave. Journal of Finance,

60: 757-782.

Mussweiler, T. 2003. Comparison processes in social judgment: Mechanisms and consequences.

Psychological Review, 11: 472–489.


Mussweiler, T., & Englich, B. 2005. Subliminal anchoring: Judgmental consequences and

underlying mechanisms. Organizational Behavior and Human Decision Processes, 98,

133–143.

Mussweiler, T., & Strack, F. 1999a. Comparing is believing: A selective accessibility model of

judgmental anchoring. European Review of Social Psychology, 10: 135–167.

Mussweiler, T., & Strack, F. 1999b. Hypothesis-consistent testing and semantic priming in the

anchoring paradigm: A selective accessibility model. Journal of Experimental Social


Mussweiler, T., & Strack, F. 2000. The use of category and exemplar knowledge in the solution

of anchoring tasks. Journal of Personality and Social Psychology, 78: 1038–1052.

Nadkarni, S., & Barr, P. S. 2008. Environmental context, managerial cognition, and strategic

action: An integrated view. Strategic Management Journal, 29: 1395–1427.

Narayanan, V. K., Zane, L. J., & Kemmerer, B. 2011. The cognitive perspective in strategy: An

integrative review. Journal of Management, 37: 305-351.

North, N. C. 1990. Institutions, institutional change and economic performance. Cambridge,

UK: Cambridge University Press.

Northcraft, G. B., & Neale, M. A. 1987. Experts, amateurs, and real estate: An anchoring-and-

adjustment perspective on property pricing decisions. Organizational behavior and

human decision processes, 39: 84-97.

Padmanabhan, P., & Cho, K. R., 1996. Ownership strategy for a foreign affiliate: An empirical

investigation of Japanese firms. Management International Review, 36: 45-65.

Powell, T. C., Lovallo, D., & Fox, C. R. 2011. Behavioral strategy. Strategic Management

Journal, 32: 1369–1386.

Priem, R. L., Walters, B. A., & Li, S. 2011. Decisions, decisions! how judgment policy studies

can integrate macro and micro domains in management research. Journal of

Management, 37: 553-580.

Rabin, M. 2013. An approach to incorporating psychology into economics. American Economic

Review, 103: 617–622.

Ragozzino, R. 2009. The effects of geographic distance on the foreign acquisition activity of

U.S. firms. Management International Review, 52: 509-535.

Ragozzino, R., & Reuer J. J. 2011. Geographic distance and corporate acquisitions: Signals from

IPO firms. Strategic Management Journal, 32: 876-894.

Ransbotham, S., & Mitra, S. 2010. Target age and the acquisition of innovation in high-

technology industries. Management Science, 56: 2076-2093.

Reeb, D., Sakakibara, M., & Mahmood, I. P. 2012. From the editors: Endogeneity in

international business research. Journal of International Business Studies, 43: 211-218.

Reuer, J. J., & Koza, M. P. 2000. On lemons and indigestibility: Resource assembly through

joint ventures. Strategic Management Journal, 21: 195-197.

Reuer, J. J., & Shenkar, O., & Ragozzino, R. 2004. Mitigating risk in international mergers and

acquisitions: The role of contingent payouts. Journal of International Business Studies,

35: 19-32.

Roll, R. 1986. The hubris hypothesis of corporate takeovers. Journal of Business, 59: 197–216.

Rosenbaum, J., & Pearl, J. 2009. Investment banking: Valuation, leveraged buyouts, and

mergers and acquisitions. New York: John Wiley & Sons.

Rovit, S., & Lemire, C. 2003. Your best M&A strategy. Harvard Business Review, 81: 16–17.


Schneper, W. D., & Guillén, M. F. 2004. Stakeholder rights and corporate governance: A cross-

national study of hostile takeovers. Administrative Science Quarterly, 49: 263–295.

Scott, W. R. 1995. Institutions and organizations. Thousand Oaks, CA: Sage.

Seth, A., Song, K., & Pettit, R. 2000. Synergy, materialism or hubris? An empirical examination

of motives for foreign acquisitions of US firms. Journal of International Business

Studies, 31: 387-405.

Shapira, Z., & Shaver, M. 2014. Confounding changes in averages with marginal effects: How

anchoring can destroy economic value in strategic investment assessments. Strategic

Management Journal, 35: 1414-1426.

Shaver, J. M., Mitchell, W., & Yeung, B. 1997. The effect of own-firm and other-firm

experience on foreign direct investment survival in the United States, 1987–92. Strategic

Management Journal, 18: 811–824.

Sherif, M. 1953. The concept of reference groups in human relations. In M. Sherif & M. O.

Wilson (Eds.), Group relations at the crossroads: 203-231. New York: Harper.

Simon, H. A. 1955. A behavioral model of rational choice. Quarterly Journal of Economics, 69:

99–118.

Talarico, J. M., & Rubin, D. C. 2003. Confidence, not consistency, characterizes flashbulb

memories. Psychological Science, 14: 455-461.

Thomas, J. B., Sussman, S. W., & Henderson, J. C. 2001. Understanding strategic learning:

Linking organizational learning, knowledge management and sensemaking. Organization

Science, 12: 331-345.

Tversky, A., & Kahneman, D. 1974. Judgement under uncertainty: Heuristics and biases.

Science, 185: 1124–1130.

Tyler, B., & Gnyawali, D. R. 2009. Managerial collective cognitions: An examination of

similarities and differences of cultural orientations. Journal of Management Studies, 46:

93-126.

Vermeulen, F., & Barkema, H. 2001. Learning through acquisitions. Academy of Management

Journal, 44: 457-476.

Weick, K. W. 1979. The social psychology of organizing (2nd ed.). Reading, MA: Addison-

Wesley.

Wells, G. L., & Olson, E. A. 2003. Eyewitness testimony. Annual Review of Psychology, 54:

277-295.

Wilson, T. D., Houston, C. E., Etling, K. M., & Brekke, N. 1996. A new look at anchoring

effects: Basic anchoring and its antecedents. Journal of Experimental Psychology:

General, 125: 387-402.

Windschitl, P. D., Kruger, J., & Simms, E. 2003. The influence of egocentrism and focalism on

people’s optimism in competitions: when what affects us equally affects me more.

Journal of Personality and Social Psychology, 85: 389–408.

Xia, J., Tan, J., & Tan, D. 2008. Mimetic entry and bandwagon effect: The rise and decline of

international equity joint venture in China. Strategic Management Journal, 29: 195–217.

Zaheer S. 1995. Overcoming the liability of foreignness. Academy of Management Journal, 38:

341-364.

Zhao, H., Luo, Y., & Suh, T. 2004. Transaction cost determinants and ownership-based entry

mode choice: A meta-analytical review. Journal of International Business Studies, 35:

524–544.


Table 1

Correlation and Descriptive Statistics

# Variables [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] [18] [19] [20] [21] [22] [23] [24] [25] [26] [27] [28]

[1] Focal intl .equity.level 1.00

[2] Previous intl. equity level 0.25 1.00

[3] Unrelated industry -0.09 0.03 1.00

[4] Political stability 0.13 0.11 -0.01 1.00

[5] R&D intensity 0.08 0.11 -0.06 0.05 1.00

[6] Industry stock volatility 0.08 0.07 0.01 0.00 0.13 1.00

[7] Cultural distance -0.23 -0.18 -0.01 -0.46 -0.07 -0.03 1.00

[8] Intl. acq. exp. -0.19 -0.04 -0.03 -0.13 -0.08 0.00 0.25 1.00

[9] Intl. JV exp. -0.26 -0.10 0.08 0.00 0.08 0.02 0.06 0.26 1.00

[10] Intl. alliance exp. -0.23 -0.02 0.09 0.05 0.34 0.07 0.06 0.29 0.47 1.00

[11] High-tech target industry 0.08 0.19 0.08 0.00 0.42 0.33 0.00 -0.10 0.08 0.28 1.00

[12] Target country interest rate -0.13 -0.07 -0.02 -0.21 -0.06 0.00 0.19 0.07 0.01 0.02 -0.05 1.00

[13] Exchange rate -0.08 -0.09 -0.06 -0.15 -0.02 0.00 0.14 0.11 0.17 0.10 -0.09 0.13 1.00

[14] Avg. foreign ownership 0.29 0.21 0.03 0.22 0.11 0.00 -0.31 -0.19 -0.08 -0.11 0.07 -0.13 -0.06 1.00

[15] Elapsed time 0.15 0.00 0.15 -0.04 -0.07 0.00 0.05 -0.13 -0.08 -0.13 -0.11 0.02 0.05 0.08 1.00

[16] Target industry intl. acq. 0.02 0.03 -0.19 0.13 -0.01 0.01 -0.18 0.06 0.02 0.07 0.00 -0.01 -0.04 -0.03 -0.46 1.00

[17] Transaction value 0.15 -0.05 -0.03 0.04 -0.12 -0.07 -0.06 0.07 -0.06 0.02 -0.13 -0.05 -0.05 0.02 -0.04 0.17 1.00

[18] Private target 0.16 0.13 0.06 -0.15 0.21 0.08 -0.02 -0.10 -0.09 -0.02 0.24 -0.01 -0.07 0.08 0.01 0.00 -0.14 1.00

[19] Tender offer 0.28 0.07 -0.02 0.14 -0.10 0.00 -0.12 -0.01 -0.11 -0.10 -0.08 -0.02 -0.03 0.11 0.10 0.02 0.15 -0.28 1.00

[20] Friendly acquisitions 0.21 0.05 -0.02 0.08 0.04 0.08 -0.09 -0.11 0.01 0.08 0.06 -0.04 0.03 -0.01 0.06 0.10 0.04 0.12 0.03 1.00

[21] Stock payment 0.02 -0.09 -0.09 0.06 -0.05 -0.01 -0.07 -0.03 0.00 -0.04 -0.06 0.00 0.02 -0.10 -0.07 0.09 0.05 -0.04 0.07 0.03 1.00

[22] Target GDP growth -0.09 -0.07 -0.01 -0.29 -0.03 0.02 0.25 0.05 0.05 -0.01 -0.01 -0.19 -0.19 -0.09 -0.07 0.06 0.02 0.05 -0.06 -0.06 -0.01 1.00

[23] CEO overconfidence 0.01 0.02 0.09 0.07 -0.02 -0.01 -0.15 0.03 -0.01 -0.01 -0.10 0.02 0.00 0.05 -0.02 0.06 0.03 -0.07 0.11 -0.06 -0.01 -0.05 1.00

[24] CEO tenure 0.02 -0.05 0.06 0.04 -0.07 0.03 -0.10 -0.05 -0.04 -0.06 -0.06 -0.02 0.04 0.08 0.06 -0.05 0.03 -0.07 0.12 -0.09 0.05 -0.07 0.08 1.00

[25] CEO duality -0.01 -0.02 0.19 -0.04 -0.14 -0.02 0.10 0.10 -0.15 -0.03 -0.05 -0.14 -0.19 0.01 0.07 0.02 0.13 -0.03 -0.01 -0.06 0.04 0.05 -0.01 0.12 1.00

[26] CEO ownership 0.01 0.05 -0.07 0.07 -0.09 0.11 -0.01 0.09 -0.01 0.11 -0.02 0.03 0.02 0.01 0.01 -0.04 0.02 -0.02 0.05 -0.02 -0.03 -0.07 -0.10 0.18 -0.11 1.00

[27] Independent board -0.03 0.04 -0.05 -0.03 0.01 -0.05 -0.08 0.03 -0.06 -0.13 -0.05 -0.04 -0.05 -0.01 0.04 -0.04 -0.05 -0.02 -0.03 0.03 -0.01 0.00 -0.03 -0.01 -0.03 -0.08 1.00

[28] Board size -0.02 -0.08 0.08 -0.04 -0.11 0.01 0.03 0.02 0.00 0.02 -0.07 0.01 0.07 -0.02 -0.01 0.05 0.15 -0.04 0.04 0.01 -0.01 0.00 0.03 -0.05 0.07 0.00 -0.66 1.00

Mean 0.72 0.67 0.61 0.56 0.05 0.59 1.06 0.91 0.21 0.36 0.36 0.06 0.00 69.93 4.83 2.81 338.24 0.25 0.19 0.88 0.45 0.04 0.38 6.72 0.45 21.92 0.59 14.56

Std. Dev. 0.37 0.37 0.49 0.71 0.07 0.38 1.20 0.84 0.45 0.66 0.48 0.11 0.08 25.40 2.05 4.61 990.29 0.44 0.39 0.32 6.09 0.03 0.49 6.16 0.50 54.37 0.17 7.04

n = 4491; correlations greater than 0.03 are significant at p = 0.05.


Table 2. Tobit Models for Anchoring Effect

Dependent variable (1) (2) (3) (4) (5) (6)

Focal acquisition ownership acquired Model Model Model Model Model Model

Unrelated Industry X Previous equity level

0.070***

0.072***

(0.012)

(0.012)

Target country political stability X Previous equity level

-0.019** -0.022**

(0.009) (0.009)

CEO overconfidence X Previous equity level

-0.001**

(0.001)

Previous equity level

0.087*** 0.041*** 0.099*** 0.054*** 0.168***

(0.005) (0.010) (0.008) (0.010) (0.041)

Industry unrelatedness -0.136*** -0.135*** -0.182*** -0.135*** -0.183*** -0.170***

(0.004) (0.004) (0.009) (0.004) (0.009) (0.028)

Target country political stability 0.011*** 0.010** 0.010*** 0.021*** 0.024*** 0.001

(0.004) (0.004) (0.004) (0.006) (0.006) (0.022)

R&D intensity 0.123*** 0.124*** 0.125*** 0.124*** 0.126*** 0.125

(0.036) (0.036) (0.036) (0.036) (0.036) (0.215)

Industry stock volatility 0.007 0.006 0.006 0.006 0.006 0.044

(0.005) (0.005) (0.005) (0.005) (0.005) (0.028)

Cultural distance -0.019*** -0.017*** -0.018*** -0.018*** -0.018*** -0.020

(0.002) (0.002) (0.002) (0.002) (0.002) (0.013)

Intl. acq. exp. 0.010*** 0.009*** 0.010*** 0.009*** 0.010*** 0.015

(0.002) (0.002) (0.002) (0.002) (0.002) (0.018)

Intl. JV exp. -0.045*** -0.041*** -0.041*** -0.041*** -0.041*** -0.051

(0.007) (0.007) (0.007) (0.007) (0.007) (0.039)

Intl. alliance exp. -0.017** -0.018** -0.017** -0.018** -0.017** -0.095***

(0.008) (0.008) (0.008) (0.008) (0.008) (0.026)

High tech industry 0.008 0.007 0.007 0.007 0.007 -0.005

(0.005) (0.005) (0.005) (0.005) (0.005) (0.036)

Target country interest rate 0.003 0.010 0.014 0.012 0.017 -0.097

(0.021) (0.022) (0.022) (0.022) (0.022) (0.085)

Exchange rate -0.006 -0.009 -0.008 -0.009 -0.008 0.067

(0.015) (0.015) (0.015) (0.015) (0.015) (0.150)

Avg. foreign ownership 0.001*** 0.001*** 0.001*** 0.001*** 0.001*** 0.001**

(0.000) (0.000) (0.000) (0.000) (0.000) (0.001)

Elapsed time 0.012*** 0.013*** 0.013*** 0.013*** 0.013*** 0.022***

(0.001) (0.001) (0.001) (0.001) (0.001) (0.006)

Target industry CBAs 0.000 0.001* 0.001* 0.001* 0.001* 0.004

(0.000) (0.000) (0.000) (0.000) (0.000) (0.003)

Transaction value 0.000*** 0.000*** 0.000*** 0.000*** 0.000*** 0.000***

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Private target 0.019*** 0.017*** 0.017*** 0.017*** 0.017*** 0.102***

(0.004) (0.004) (0.004) (0.004) (0.004) (0.030)

Tender offer 0.450*** 0.445*** 0.446*** 0.445*** 0.446*** 0.415***

(0.006) (0.006) (0.006) (0.006) (0.006) (0.035)

Friendly acquisition 0.162*** 0.158*** 0.158*** 0.158*** 0.158*** 0.129***

(0.005) (0.005) (0.005) (0.005) (0.005) (0.038)

Stock payment 0.002*** 0.002*** 0.002*** 0.002*** 0.002*** 0.003***

(0.000) (0.000) (0.000) (0.000) (0.000) (0.001)

Target GDP growth -0.278*** -0.216*** -0.203*** -0.206*** -0.191** -0.030

(0.078) (0.077) (0.077) (0.077) (0.078) (0.469)

Inverse mill's ratio -3.398*** -3.355*** -3.358*** -3.352*** -3.355*** -3.640***

(0.042) (0.042) (0.041) (0.042) (0.041) (0.317)

CEO overconfidence

0.102**

(0.052)

CEO tenure

-0.001

(0.002)

CEO duality

0.071**

(0.027)

CEO ownership

0.000

(0.000)

Independent board

-0.165

(0.108)

Board size

0.001

(0.003)

CEO past acquisition experience

0.003

(0.004)

Intercept 0.602*** 0.566*** 0.600*** 0.563*** 0.598*** 0.698***

(0.020) (0.020) (0.020) (0.020) (0.020) (0.170)

Year, industry and country fixed effect Yes Yes Yes Yes Yes Yes

Observations 4,491 4,491 4,491 4,491 4,491 536

Chi Square 2707.91*** 2766.1*** 2775.52*** 2767.19*** 2777.1*** 463.19*** *** p < 0.01. ** p < 0.05. * p < 0.1. Robust standard errors clustered on acquiring firms are reported.


Table 3

Hedonic Regression Models

Variables

Previous Deal

Hedonic Model

Focal Deal

Hedonic Model

R&D intensity 0.51*** 0.18**

(0.11) (0.07)

Cultural distance -0.02*** -0.02***

(0.01) (0.01)

Intl. acq. exp. -0.00 -0.01**

(0.01) (0.01)

Intl. JV exp. -0.09*** -0.06***

(0.02) (0.01)

Intl. alliance exp. -0.06*** -0.05***

(0.02) (0.01)

Industry relatedness 0.02 0.05***

(0.012) (0.01)

High-tech target industry -0.00 0.01

(0.02) (0.01)

Target country interest rate -0.07 -0.01

(0.07) (0.06)

Exchange rate 0.07 0.03

(0.05) (0.05)

Avg. foreign ownership 0.00*** 0.00***

(0.00) (0.00)

Elapsed time 0.01*** 0.02***

(0.00) (0.00)

Target industry intl. acq. 0.00 -0.00

(0.00) (0.00)

Institutional distance -0.01 -0.01

(0.01) (0.01)

Transaction value 0.00*** 0.00***

(0.00) (0.00)

Private target 0.07*** 0.06***

(0.01) (0.01)

Tender offer 0.20*** 0.24***

(0.02) (0.01)

Friendly acquisition 0.19*** 0.20***

(0.02) (0.01)

Stock payment 0.00 0.00

(0.00) (0.00)

Target GDP growth 0.08 -0.15

(0.24) (0.21)

Intercept 0.59 0.46

(0.40) (0.35)

Year, industry and country fixed effect Yes Yes

Observations 2862 4491

R square 0.29 0.32 *** p < 0.01. ** p < 0.05. * p < 0.1. Standard errors are clustered on acquiring firms.


Table 4

Anchoring Regression Models

Step 2 Anchoring Regression (Tobit Model) Model 1

Focal predicted equity level (𝜂) 0.608***

(0.016)

Anchoring effect (preceding – predicted equity acquired) (𝛿) 0.133***

(0.019)

Vicarious learning (𝜃) 0.053***

(0.016)

Constant 0.222***

(0.046)

Year, industry and country fixed effect Yes

Observations 2862

Model χ2 1239.85***

*** p < 0.01. ** p < 0.05. * p < 0.1. Standard errors are clustered on acquiring firms.

The following model was estimated in the above regression:

𝑌𝑡 = 𝜂 ∙ 𝑅𝑡 + 𝜃 ∙ (𝑌𝑡−1 − 𝑅𝑡−1) + 𝛿 ∙ (𝑌𝑡−1 − 𝑅𝑡) + 휀𝑡

Other Sensitivity Analyses: The results are robust to various sampling variations. First, our results are robust after

removing U.K. and U.S. acquirers, which accounted for 34% of the 2,862 international acquisitions in our sample.

Second, our results are robust after removing international acquisitions whose transaction values were less than $50

million. Third, our results are robust after excluding acquisitions in regulated industries, such as the financial

industry or utilities. Finally, our results are robust after we removed any entries for which the focal and preceding

international acquisitions were too close (100 days or less)—this ensures that our results are not due to clustering

pattern of M&A transactions.


Table 5

Tests for Alternative Explanations

Dependent variable (1) (2) (3) (4) (5)

Focal acquisition ownership

acquired

Tender

offers

Unfriendly

deals

Unsuccessful

deals

Focal and

previous

acquirers from

diff. countries

Previous equity

level exceeds

average industry

deviation

Previous equity level 0.087*** 0.038** 0.171*** 0.055*** 0.087***

(0.006) (0.017) (0.029) (0.005) (0.007)

Control Variables

Industry unrelatedness -0.135*** -0.207*** -0.089*** -0.145*** -0.158***

(0.004) (0.010) (0.011) (0.004) (0.007)

Target country political stability 0.009** 0.005 0.013 0.008** 0.010*

(0.004) (0.008) (0.012) (0.004) (0.006)

R&D intensity 0.139*** 0.180 0.146* 0.136*** 0.018

(0.041) (0.156) (0.085) (0.035) (0.066)

Industry stock volatility 0.009 -0.010 0.025 0.006 0.018**

(0.005) (0.013) (0.018) (0.005) (0.008)

Cultural distance -0.017*** -0.027*** -0.024*** -0.015*** -0.016***

(0.002) (0.004) (0.006) (0.002) (0.003)

Intl. acq. exp. 0.010*** 0.022*** 0.005 0.008*** 0.017***

(0.003) (0.006) (0.006) (0.002) (0.004)

Intl. JV exp. -0.044*** -0.040*** -0.013 -0.031*** -0.039***

(0.007) (0.011) (0.035) (0.005) (0.009)

Intl. alliance exp. -0.018** -0.039*** -0.025* -0.024*** -0.019**

(0.009) (0.012) (0.015) (0.005) (0.010)

High-tech target industry 0.005 -0.003 -0.004 -0.011** 0.016*

(0.005) (0.012) (0.013) (0.005) (0.009)

Target country interest rate -0.014 -0.229*** -0.226** 0.010 0.087***

(0.024) (0.034) (0.098) (0.027) (0.029)

Exchange rate -0.013 0.104*** -0.035 -0.007 -0.062***

(0.016) (0.031) (0.041) (0.016) (0.023)

Avg. foreign ownership 0.001*** 0.001*** 0.001*** 0.001*** 0.001***

(0.000) (0.000) (0.000) (0.000) (0.000)

Elapsed time 0.014*** 0.023*** 0.030*** 0.011*** 0.023***

(0.001) (0.002) (0.003) (0.001) (0.001)

Target industry CBAs 0.000 0.001 0.001* -0.000 0.003***

(0.000) (0.002) (0.001) (0.000) (0.001)

Transaction value 0.000*** 0.000*** 0.000*** 0.000*** 0.000***

(0.000) (0.000) (0.000) (0.000) (0.000)

Private target 0.012*** 0.064*** 0.070*** 0.023*** 0.018***

(0.004) (0.009) (0.012) (0.004) (0.006)

Tender offer 0.450*** 0.484*** 0.434*** 0.472*** 0.478***

(0.007) (0.015) (0.021) (0.006) (0.008)

Friendly acquisition 0.156*** 0.132*** 0.089*** 0.166*** 0.170***

(0.006) (0.011) (0.021) (0.005) (0.006)

Stock payment 0.002*** 0.003*** -0.004*** 0.003*** 0.003***

(0.001) (0.001) (0.001) (0.001) (0.000)

Target GDP growth -0.165** -0.210 0.823** -0.317*** 0.045

(0.080) (0.171) (0.337) (0.084) (0.110)

Inverse mill's ratio -3.342*** -3.605*** -2.838*** -3.519*** -3.506***

(0.046) (0.083) (0.156) (0.041) (0.063)

Intercept 0.532*** 0.765*** 0.756*** 0.587*** 0.535***

(0.021) (0.040) (0.071) (0.022) (0.027)

Year, industry and country fixed

effect Yes Yes Yes Yes Yes

Observations 3,920 586 472 3,123 2,124

Chi Square 2424.68*** 528.52*** 369.71*** 1967.11*** 1383.44***

*** p < 0.01. ** p < 0.05. * p < 0.1. Standard errors are clustered on acquiring firms.


Figure 1A.

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

Figure 1B.

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

Figure 1C

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

sticky decisions: anchoring and equity stakes in international acquisitions

Documents