What makes a corporate merger go bad? Is it a dramatic change in stock price? A revelation about an unprofitable business unit? Resistance from federal regulators?
Researchers from the University of British Columbia propose another explanation – too much testosterone.
Maurice Levi, Kai Li and Feng Zhang of the university’s Sauder School of Business came up with their theory based on prior research showing that the male sex hormone affects the way men play the ultimatum game. In one version of this game, Player A was asked to divide up $40 between himself and Player B – he could choose either a $35-$5 split, or a $15-$25 split. If Player B accepted the offer, both men got to keep their cash; if Player B rejected it, they both wound up empty-handed. In theory, Player B should accept any offer, since even $5 in free money is better than nothing. But in reality, the lowball offer is often rejected because it is seen as an insult.
In a 2007 study, Terry Burnham of Harvard University’s Program for Evolutionary Dynamics took saliva samples from the mouths of all players and used them to determine their testosterone levels. He found that among Player Bs with below-average testosterone, only 7% rejected the $5 offers. But among Player Bs with high testosterone, the rejection rate for such offers was 45%.
For their study, the Canadian researchers looked at a real-life version of the ultimatum game – corporate mergers. Of course, the scenario isn’t exactly the same – a company that receives a takeover bid can try to negotiate a better price. But they figured it was close enough.
The researchers identified 357 takeover bids that occurred between Jan. 1, 1997, and Dec. 31, 2007. Of course, they couldn’t go back and time and measure testosterone levels for the CEOs involved in the deals. So instead, they looked up their ages and used those as a proxy, since studies have shown that testosterone levels typically decline with age.
With all that data in hand, they found that CEOs who launched takeover bids were about 20% more likely to withdraw their bids later if they were young – and presumably amped up on testosterone. The theory is that when the CEO of a target company rejects a takeover bid as too low, the “young, high-testosterone bidder CEO” is more likely to demonstrate his “dominance” by withdrawing the bid altogether rather than negotiating a higher price, the researchers wrote.
The age (and thus, testosterone level) of the target CEO also had a tiny effect. When those CEOs were young, they were about 1% more likely to reject a takeover bid and then find themselves subject to a tender offer – a strategy in which the bidding company goes around the CEO and takes its offer directly to the target company’s shareholders.
Perhaps publicly traded companies should be required to disclose their CEOs’ testosterone levels in their filings with the Securities and Exchange Commission.
-- Karen Kaplan/Los Angeles Times