Research on the relationship between managerial overconfidence and M&A decision-making-moderating role based on board vigilance

Research by Shi and Zhu [5] show that companies with overconfident managers are about 20% more involved in implementing M&A than those that are not overconfident. CEO overconfidence is more likely to lead to M&A, [9], Doukas and Petmezas [10], Brown and Sarma [11] where studies also prove this. Gervais et al. [12] also found that CEO overconfidence underestimated investment risks and made more investment decisions, venture incentives encourage the manager to take on investment and acquisition with excessive overconfidence [13], SOE managers are more overconfident and tend to initiate M&A than private enterprise executives [14], and manager overconfidence is significantly and positively associated with M&A decisions [15]. Although the study of Shi et al. [16] believes that the motivation of manager for frequent M&A is more in the pursuit of selfish interests, the ‘leverage effect’ of managers’ overconfidence strengthen the willingness of M&A, when corporate cash flow is abundant, and management overconfidence promotes more significant M&A [17]. To sum up, many scholars’ research conclusions show that managers’ overconfidence leads to M&A decision, which is likely because managers of listed companies have a famous background, have rich management experience, have advanced management concept and strong management skills, and have thought process to control the process of M&A and after resource integration, they feel it is so easy to initiate M&A, based on the above analysis. We have put forward the following assumptions:

H1: Overconfident managers are more likely to initiate M&A than non-overconfident management

There is no clear definition of board vigilance, only found in a few pieces of literature on board vigilance. According to the definition of Cihai, vigilance refers to the nature of the alert, so this paper defines board vigilance as the board of directors for the steady development of the enterprise and keeping alert and guarding against a psychological and a series of preventive measures. By this definition, increased board vigilance may be beneficial to correcting irrational decisions.

Improved vigilance measures have a variety of impacts. There are two ways in which we can improve the board vigilance; The first way is when the chairman, not the concurrent general manager, can step in and better play the role of supervisor and improve vigilance. Otherwise, it will weaken the board's vigilance, and in turn will lead to the general manager's overconfident decision, which cannot be corrected in time [18]. This situation can be conducive to weakening M&A [19]. The second way is through the independent director, who can also enhance the vigilance of the board of directors, and who can play an important role in making major M&A decisions [20] by increasing the proportion of independent directors and help restrain the irrational M&A of managers [11]. The increase in the number of independent directors has significantly inhibited the M&A scale and frequency of enterprise [21], which has improved the level and quality of M&A decisions [22] by reducing M&A probability [23]. However, the study by Zhu and Yu [24] found that increasing the proportion of independent directors did not have a significant impact on managers’ overconfidence and M&A decisions. Rao and Wang [25] found that the proportion of independent directors had no significant impact on CEO overconfidence. Board vigilance can also be indicated by the greater the number of board meetings; the more regulatory the board conducts itself, the more important will be its role, indicating increased board vigilance [26].

In summary, foreign scholars believe that the vigilance of the board of directors inhibits the overconfidence of managers. The research conclusions of domestic scholars are not completely consistent with those of foreign studies, perhaps because of the short history of China's listed companies, imperfect systems and mechanisms, in not having transparent disclosure, due to incomplete or unrepresentative samples, or because of the differences in the selection orientation of the study sample. With the continuous improvement of the system and mechanism of listed companies in China, information disclosure is becoming more transparent, sample selection is more scientific and reasonable, perhaps concluding similar to those of foreign studies, and increasing board vigilance suppresses manager overconfidence and M&A [27]. Based on the above analysis, the following assumptions are hereby proposed:

H2: The vigilance of the board of directors can adjust the positive impact of managers’ overconfidence on M&A, and can restrain managers’ overconfidence and M&A

In this paper, the A-share data of Chinese listed companies from 2016 to 2020 were selected as samples, and some data from 2015 to 2019 were used due to the need for research design. Sample selection obeys the following principles: (1) Excluding listed companies with abnormal financial conditions, including ST*, ST and PT listed companies; (2) Excluding unsuccessful listed companies; (3) Excluding insolvent listed companies; (4) Excluding listed companies with missing and abnormal data; (5) Excluding listed companies during the sample period because the combination affects the independence of the board of directors; (6) Limited data integrity, after the above operations, a total of 935 samples came from 187 listed companies. Sample data are from the Tai’an (CSMAR) database and using software including Excel and Stata 12.

To test the relevant hypotheses, building Models (1) and (2) are used to test Hypothesis (1) and Assumption (2), respectively: (1) Merger=β0+β1OC+control variable+ɛ Merger = {\beta _0} + {\beta _{1{O_{C + }}}}{control\, variable} + \varepsilon (2) Merger=β0β1OC+β2OC×Bd+control variable+ɛ Merger = {\beta _0}{\beta _{1OC}} + {\beta _{2{O_{C \times }}}} {\rm Bd} + {control\, variable} + \varepsilon In the model, M&A is the M&A decision, O_C for manager overconfidence, Bd for the board vigilance, control variable for the control variable, β i is the regression coefficient used, which ɛ is a random error term.

Table 2 presents descriptive statistics for the variables, including M&A decision (M&A), overconfidence (Oc), and board vigilance (Bd). The maximum value of an M&A decision is 1, the minimum is 0, while the mean is 0.8, indicating that most managers tend to go after M&A and the standard deviation is 0.40, indicating that managers of listed companies differ in M&A. The maximum value of manager overconfidence (Oc) is 1, the minimum is 0, and the mean is 0.96, indicating that most managers tend to be overconfident and the standard deviation is 0.2, indicating the dispersion of overconfidence is small. Bd maximum is 3.67, and the minimum value is 0.69, which shows that the different listed companies’ board vigilance difference is big, the supervision of managers also is different, and the average of these is 2.27, which on the whole, the board of directors of listed companies has a strong supervision effect on managers; with the standard deviation of 0.05, the dispersion of the board of directors’ vigilance of listed companies is small. Descriptive statistical results of the other control variables are presented in Table 2, which are limited to space, and will not be detailed here.

The correlation analysis covers nine variables, including M&A decision, management overconfidence, board diligence, company size, executive average age, cash stock, executive cash compensation and asset-liability ratio, and the correlation analysis result is shown in Table 3.

According to Table 3, manager overconfidence is positively correlated to M&A decisions. It preliminarily shows that managers’ overconfidence can positively affect M&A decisions. While board diligence is positively related to the M&A decision, it can be preliminarily determined that the board diligence performance positively affects the M&A decision, and further empirical analysis is needed. As enterprise size is positively correlated with M&A decisions, preliminary evidence shows that the larger the enterprise scale, the more likely to initiate M&A. Average age of the executive is negatively associated with M&A decisions, and a preliminary study shows that the older the manager, the more conducive to inhibiting M&A. Cash stock is negatively correlated to M&A decision, which indicates that cash stock will not promote M&A. Executive compensation is significantly and positively correlated with M&A decisions, and it shows that executive compensation can significantly affect M&A decisions. While the asset-liability ratio is positively correlated with M&A decisions, it indicates that enterprises are likely to be acquired through debt. According to Table 3, the absolute value of the correlation coefficients of any two variables is <0.7, and multi-collinearity was excluded, it also shows that with the appropriate selection of indicators, the next study can be conducted.

Due to the missing variables caused by unobserved individual differences or heterogeneity, this paper adopts panel data, and because the M&A decision is a binary virtual variable, this paper uses Xtlogit model for regression analysis. The regression data is shown in Table 4. Column 1 is based on Model (1), and column 2 is based on Model (2) of the regression results, and with each column of regression data is the regression coefficient, the M&A decision can be tested according to the regression coefficient.

Although this regression analysis uses the Xtlogit model, to some extent, the negative impact of the analytical conclusions is reduced, which is caused by possible missing variables. However, to further test the reliability of the empirical analysis conclusion, the robustness test was performed using the Xtprobit model, and the test data are shown in columns 3 and 4 of Table 4. Column 3 is based on the regression result of Model (1), while column 4 is based on the regression result of Model (2). Each column of data is also the regression coefficient of each variable and the M&A decision, according to the regression coefficient to test the hypothesis. Considering that the overconfidence of managers is related to their own compensation, the higher the compensation is, the higher the degree of overconfidence tends to be. To further test the robustness of the empirical analysis conclusion, the executive compensation ratio is used to substitute earnings forecast to measure the overconfidence of managers, and the Xtprobit model is used again to conduct the robustness test. Data processing uses the listed top three highest-paid companies. The sum of executive compensation, that is, all executives pay combined ratios measure managers’ overconfidence;, if the ratio is greater than the sample of all the companies’ combined ratio on average, the companies’ managers are regarded as having overconfidence and the value is 1, then the company managers overconfidence conversely turns to value 0.