Foreign-born CEOs more likely to acquire assets across borders - particularly in their home countries: Study

CEOs who have moved away from their country of origin are more likely to make international acquisitions, with a preference for targets in their birth country, a new study by researchers at the University of Toronto shows.

Using a sample of nearly 1,300 corporate acquisitions over a 14-year period, Ron Shalev, an associate professor of accounting at U of T Scarborough who is cross-appointed to the Rotman School of Management, and his co-authors compared acquisitions, financial and other corporate data with biographical information on the companies’ CEOs at the time of the purchases.

“Foreign-born CEOs are taking an increasing leadership role in the corporate world,” says Shalev of the research. “In our sample, 24 per cent of the acquiring companies have foreign-born CEOs.”

The study, published in the Journal of Accounting Research, was co-authored by Milan-based researchers Antonio Marra of the Università Bocconi and Angela Pettinicchio of Università Cattolica del Sacro Cuore and SDA Bocconi School of Management. 

After examining the data, Shalev and his colleagues found that foreign-born CEOs were 43 per cent more likely than domestic-born ones to acquire across borders – and that the phenomenon may be explained by a preference for acquiring in the countries of their birth. When considering all potential international targets that might be on the CEO’s radar, the researchers found that foreign-born CEOs were 17 times more likely to go after a buy in their country of origin versus another cross-border acquisition.

That difference was explained by the CEO having a leg up by knowing more about the country and having local connections. They are also driven by a desire to “give back” to the place where they came from, the researchers say.

The researchers also found that foreign-born CEOs were more than twice as likely to make an acquisition in a former colonizer of their birth country as they were to choose any other potential international target. “The idea is that if a CEO wants to bring pride to the birth country, she would acquire targets in the country that colonized it in the past,” says Shalev.

How are companies involved affected by CEOs tendency to acquire targets in their birth country? The acquiring company’s shareholders see a 1.3 per cent difference in excess returns on acquisitions in the CEO’s birth country, while shareholders of the target company enjoy a 2.9 per cent excess premium due to the purchase.

“This is not something that should prevent the hiring of a CEO,” Shalev says of the findings.

Instead, he says it’s simply an aspect a company’s board should be aware of and, if the CEO has a target in mind in their birth country, to take a harder look at the proposal. “In many cases these acquisitions will be good for the acquirer firm – but not always.”