Bias, Identity and M&A

Corporate executives play a central role, perhaps even the central role, in a firm’s decision to undertake a merger or acquisition (M&A). M&A deals are often done at the behest of executives, who also largely run the deal-making process. Senior executives, especially CEOs, play a pivotal role in crafting, negotiating, and closing deals. They are also the chief seller, or “cheerleader,” of the deal to shareholders and other stakeholders. The actions of executives in M&A deals are aided by, and at times monitored by, other corporate actors, including the board of directors.

Examination of the academic literature on executive bias and identity

Over the past two decades, a rich body of academic literature has sought to understand the motivations and incentives of executives in M&A deals. One important strand of this literature explores the behavioral biases of executives in M&A transactions. Studies support the claim that behavioral biases, such as overconfidence and hubris, are important drivers for M&A deals. Other studies point to peer effects. Studies suggest that social factors, such as extensive business or educational ties, among managers of bidder and target firms can undermine decision making in M&A deals. CEOs, for example, may be tempted to engage in M&A in order to keep up with peers, especially after their competitors win CEO awards.

A related strand of literature focuses on the identity of managers and explores the impact that manager identity has on the incentives for, and outcomes of, M&A deals. One study suggests that women executives approach M&A transactions differently from male executives, finding that male CEOs undertake more acquisitions, with worse performance, and exhibit relative overconfidence in significant acquisitions compared with women CEOs. Other studies suggest that increased gender diversity on boards is associated with less overpayment in acquisitions and with fewer acquisitions overall. And related research finds that gender diversity on boards helps temper the overconfidence of male CEOs.

Holding officers accountable – existing corporate governance mechanisms

These studies raise important questions about whether existing corporate governance mechanisms are effective in monitoring and holding executives accountable. To date, the law has struggled with how to respond to the findings in behavioral finance regarding executive decision-making in M&A. How to respond becomes even more complex in light of the literature on executive identity and in attempting to understand the role that identity plays in perpetuating behavioral biases. Existing corporate governance solutions, such as fiduciary duty litigation, board independence, and greater disclosure have not addressed the root causes of executive behavioral biases. It is doubtful that they can adequately address behavioral biases if such biases are also tied to gender identity.

The complexity of the challenges raised by the bias and identity literature defy simple legislative interventions. Even if empirical evidence suggests that bias and identity play important roles in M&A decisions, the question remains as to what extent the law can and should be proactive in encouraging additional diversity in the C-suite. For now, legislation in some states, such as California, have addressed board diversity, but no state has moved toward making a legislative push for diversity in the C-Suite.

It also seems unlikely that we can address bias and identity through our usual corporate governance tools of litigation and the courts. Fiduciary duty obligations are a primary way to hold officers accountable under corporate law. Much of the guidance on accountability and behavioral norms for corporate fiduciaries comes from the lessons drawn from judicial pronouncements. But, officer fiduciary duty doctrine has developed at a slow pace, leaving little judicial guidance. Not only has the law largely insulated officers from meaningful oversight and discipline through the courts, but the lack of judicial exploration into officer fiduciary duties has also meant that directors are largely left without “moral guidance” on best practices for holding officers accountable.

Moreover, the scholarship on executive bias and identity in M&A transactions raises questions about whether litigation as a formal mechanism for holding officers accountable is the right tool for addressing shortcomings in the M&A process. Delaware jurists at both the Chancery and Supreme Court level deeply appreciate C-suite biases. Nevertheless, combining an analysis of these psychological observations together with the gender of the officers and directors making transactional judgments pushes the institutional boundaries of the courts.

Holding officers accountable – other avenues and the importance of behavioral research

Of course, litigation is not the only avenue for holding officers accountable and improving corporate governance in M&A. A variety of informal mechanisms, including market constraints, market effects, social norms, and shaming, also play an important role in officer accountability. For these other mechanisms to work, it is important for boards, market actors, investors, and advisors to be aware of the findings on behavioral biases and identity, and their impact on fundamental decisions such as M&A transactions. Such awareness may further promote actions that are already underway. Institutional investors have advocated for a greater number of women in the boardroom. Shareholder pressure is also forcing boards to confront diversity head on. For example, a shareholder proposal for Amazon to adopt a so-called “Rooney Rule” and include women and people of color among candidates for each board seat was eventually supported by the board. These market reactions may be as appropriate of a response to the challenges raised by executive bias and identity as legal interventions.

The research on bias and identity should also inform the work of dealmakers. As Professor Don Langevoort has argued: “the rich body of behavioral M&A research can and should inform how deals are negotiated, structured, and approved, even in the setting of minimal judicial review.” And a plethora of research from a variety of fields suggests that increased gender diversity could lead to better decision-making processes in complex transactions. As fiduciaries charged with exercising an informed judgement, boards should be aware of the research on bias and identity so that they are mindful of overconfidence and identity bias , and conscious of the need for gender diversity at the upper echelons of decision-making in M&A deals.

Our recent paper argues that existing legal solutions, such as fiduciary duty litigation, board independence, and greater disclosure, appear ill designed to address officer accountability, especially if officer gender identity plays a significant role in reinforcing or perpetuating biases. The paper posits that designing solutions to address bias and identity requires a much deeper understanding of the interplay between these factors and M&A transactions. The paper thus proposes the need for additional research to further our understanding about the role of bias and identity in M&A, including research to contextualize the empirical findings in the current literature and elucidate how corporate governance functions on the ground. For example, in-depth qualitative research can help unpack the complicated relationship between bias and identity in M&A to better understand a variety of questions, including: (i) Whether women CEOs make decisions differently in M&A transactions because women executives view their role differently and/or because boards monitoring women CEOs exercise oversight differently over a woman CEO? (ii) What processes do boards with a critical mass of women adopt when advising on and monitoring executives with respect to M&A transactions? Do these processes differ from those adopted by boards without a critical mass of women? (iii) Does the relationship and advice of financial and legal advisors differ in M&A transactions when the CEO is a woman? (iv) What roles do biases, whether explicit or implicit, play in the interaction of advisors when women lead the C-Suite? (v) If women CEOs do indeed execute M&A transactions differently than male CEOs, what are the norms of behavior that can be evolved from the processes undertaken by women CEOs?

In short, further analysis of how executives actually experience and execute M&A deals on the ground is vital for us to have a clearer understanding of the root causes of behavioral biases and the role that identity plays in perpetuating behavioral biases, and to be able to design solutions that address these root causes.


Afra Afsharipour is Senior Associate Dean for Academic Affairs & Professor of Law at U.C. Davis School of Law.

 This post is adapted from her paper Bias, Identity and M&A, published in 2020 Wisconsin Law Review 469 (2020).

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