The Economic Sentiment, Performance Relative to Aspirations, and Firms’ Acquisition Behavior

Abstract

Prior management literature based on the behavioral theory of the firm has not yet examined the relationship between positive economic sentiment and firms’ acquisition behavior. Furthermore, it has not revealed how performance relative to aspirations –both positive and negative- moderate this relationship. Drawing on behavioral research from economics, finance, and management, we propose that increases in positive economic sentiment increase firms’ acquisitions by containing relevant domain information on the increasing favorability of the economic conditions for making acquisitions, providing firms with external information that complements the internal information they use to make acquisition decisions, and revealing to them external collective wisdom regarding the markets’ disposition toward acquisitions. We also posit that the effect of positive economic sentiment on firms’ acquisition behavior is contingent on firms’ performance relative to their aspirations. We find evidence to support most of our hypotheses by studying 1,148 firms in 253 industries with 13,192 acquisitions during the 1980 to 2015 period. We contribute to the behavioral management literature by showing that positive economic sentiment is a predictor of firms’ acquisition behavior and that firms’ performance relative to aspirations is an important boundary condition in this relationship.