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Top Management Team Diversity and Acquisition Quality

Acquah, Felix Kobla
This research study investigates the impact of top management team diversity (TMT) on the quality of acquisition decisions as reflected in announcement returns to acquirer shareholders. Firms pursue acquisitions with the strategic rationale of increasing shareholder value, improving market share, and achieving economies of scale. Despite these compelling motivations, acquisitions have not always yielded the desired results in terms of increasing shareholder value. This is generally attributed to poor decision making on the part of the TMT. Upper Echelons Theory suggests that TMT decision quality is enhanced when team members come from diverse backgrounds as they bring diversity of opinions and resource knowledge which allow for a more robust sharing of ideas and viable alternatives. Therefore, this study focuses on TMT diversity traits the dimensions of gender diversity, age diversity, job diversity, cultural diversity, tenure diversity, and political affiliation diversity and how these diversity traits impact the decision making process as reflected in the announcement returns of acquirer. I use announcement period returns to acquirer shareholders as my measure of acquisition decision quality due to its extensive use in the finance literature to assess the efficacy corporate policies including investment decisions (Guiso et al., 2008; Bottazzi et al., 2010), cash holdings (Chen et al., 2015) and cost of capital (Gray et al., 2013).
I find that age diversity, political diversity, current tenure diversity, and cultural diversity have significant effect on acquisition quality. This means that the shareholders of acquiring firms overall can expect to earn higher abnormal returns when these aforementioned diversity characteristics are present at the TMT level of the firm. Additionally, I find that the impact of these diversity characteristics on acquirer returns are more profound when the deal value of the acquisition is at least 20% of the acquiring firm's size. Furthermore, I also find that TMT diversity characteristics such as gender diversity and total tenure diversity do not have significant effect on acquisition quality as reflected in the announcement returns of the acquirer. Thus, not all diversity characteristics appear to enhance acquisition decision quality. In conclusion, TMT diversity overall promotes better decision making.