The relation between conditional conservatism and managerial herding: evidence from M&A waves

We examine the association between conditional conservatism and managerial herding in an M&A setting. Managerial herding occurs when managers imitate other firms’ behaviour and rely less on private signals. In the M&A context, herding is more likely when stock markets are booming and managers underweight target fundamentals and private inputs to obtain short-term gains at the expense of long-term performance. We argue that a firm’s commitment to conservatism reduces herding, making managers focus more on target fundamentals and private signals than outsiders’ behaviour. Our empirical evidence confirms our hypothesis: we find that more conservative firms have a lower probability of undertaking M&As during booming markets. This lower probability, in turn, is associated with higher acquisition performance. By focusing on a distinct source of investment inefficiency, our results uncover an additional benefit of conditional conservatism thus contributing to the literature on the real effects of conservatism.