Managerial Overconfidence,Free Cash Flow And Cross-border M&A Performance

In the recent years,China’s foreign investment has grown rapidly.China’s foreign direct investment reached US$158.3 billion in 2017,of which cross-border M&A transactions reached US$121.4 billion,but the long-term performance of M&A was not satisfactory.Some scholars have shown it is necessary to return to the main body of M&A decision-making.In the study of corporate mergers and acquisitions activities,Roll(1986)proposed the Hubris hypothesis,which believes that most of the company’s M&A activities are caused by the manager’s overconfidence.Managers generally have psychological characteristics of overconfidence,which are important factors influencing M&A decisions.From another perspective,managers will be influenced by internal resources when making M&A decisions.Then,corporate free cash flow is an important internal resource,its impact on cross-border M&A,and the relationship between overconfidence and cross-border M&A performance.This paper will stand in the perspective of behavioral finance,abandon the assumption of traditional economics"rational people",and explore the relationship between managerial overconfidence and cross-border M&A performance.It will also explore further the impact of free cash flow on the relationship between the two.This paper conducts an empirical study on the cross-border M&A events of listed companies in China from 2008 to 2015.The measurement methods of each variable are as follows:the performance of cross-border M&A is measured by continuous holding extraordinary income(BHAR),the manager’s overconfidence is measured by relative salary method,and the free cash flow is based on the“free cash flow of managers”defined by Fu Rong(2006).Through empirical research,the paper draws the following conclusions:Managers’overconfidence has different degrees of negative impact on the performance of one to three years after cross-border mergers and acquisitions,and the impact has passed the statistical significance test.Compared with state-owned enterprises,private enterprise managers may be more prone to cognitive bias,resulting in low performance of mergers and acquisitions.In studying the regulatory effects of free cash flow,it was found that free cash flow can strengthen the negative relationship between managerial overconfidence and cross-border M&A performance,that is,the more abundant free cash flow companies,the stronger the negative relationship between the two.Finally,this paper proposes relevant suggestions to alleviate the negative impact of overconfidence of managers in cross-border mergers and acquisitions.