Indore (Madhya Pradesh): Psychological traits of chief executive officers, especially their prevention focus, influence their decisions regarding the geographic distance of target firms in cross-border acquisitions (CBAs), according to a study co-investigated by IIM Indore.
CEOs with a high prevention focus, characterised by risk aversion and vigilance, tend to avoid acquisitions that involve greater geographic distance, reveals the study led by Prof Manish Popli. “While this caution may protect against risks, it could also limit a firm’s opportunities for international growth. The study highlights the importance of understanding a CEO’s psychological attributes when making strategic decisions, as they can impact the firm’s global expansion and growth potential,” the researcher said.
Cross-border acquisitions have long been recognised as essential strategies for international expansion, granting firms swift access to foreign markets and valuable assets. While factors such as market size, resource endowments and firm-level characteristics have been extensively studied in influencing location choices, the psychological traits of CEOs have largely remained unexplored.
The study’s findings suggest that psychological factors, particularly a CEO’s prevention focus, can play a major role in determining the geographic distance of target firms in the CBA decisions. “Prevention-focused CEOs are characterised by heightened vigilance, risk aversion and a strong desire to avoid failure. These traits often result in hesitancy when considering acquisitions in far-flung regions, as the geographical distance introduces complications such as information asymmetry, integration challenges and increased costs in communication and monitoring. Popli’s research used data from 218 cross-border acquisitions by public firms in the United Kingdom between 2006 and 2014.
The study reveals that CEOs with a high prevention focus were more likely to avoid target firms situated at a greater geographic distance. “This vigilance, while safeguarding against potential risks, might also hinder opportunities for growth and global expansion,” the findings states. The research draws on the regulatory focus theory, which differentiates between promotion-focused and prevention-focused individuals. While promotion-focused individuals pursue opportunities and rewards, prevention-focused individuals prioritise security and risk mitigation.
In the context of CBA, a prevention-focused CEO may avoid distant markets even when such acquisitions are critical for a firm’s survival and growth. The study highlights the importance of understanding the psychological attributes of CEOs in the boardroom, especially when making decisions that could have far-reaching implications for the firm’s strategic trajectory. It also suggests that boards of directors should be mindful of their CEO’s psychological tendencies, particularly a strong prevention focus, to ensure that valuable growth opportunities are not missed due to excessive risk aversion.
