Inside the Board Room: Nationality, Cultural Diversity and Cross-Border Merger Outcomes

Abstract

In recent years, an increase in the number of foreign directors on corporate boards of large multinational corporations has seemingly gone hand in hand with significant growth in cross-border merger (CBM) activity. We analyze the influence of internationalization of the board of directors on announcement returns and post-merger performance of U.S. acquirers. In a sample of completed CBMs by U.S. corporations between 1996 and 2013, we find a negative association between the presence of foreign directors on the board and CBM announcement returns and post-merger operating performance. This negative relationship is driven mainly by directors from countries with greater cultural distance relative to the United States. Furthermore, the negative effect of foreign directors in connection with culture diversity on merger performance is more pronounced in diversifying, high-tech CBMs. The negative association remains when the directors are domiciled in the country where a merger takes place. However, their presence contributes to lower bid premiums, reflecting some benefits from their local expertise. Finally, such negative impact is mitigated by the gender diversity of the acquiring firm’s corporate board, which suggests a more inclusive tone helps to reduce potential cultural conflicts inside the board room.