Tatiana Nikiforova Behavioural Economics
Deal or No Deal
Your CEO’s balls may have a bigger
effect on your company’s decision
making than previously thought. An
insightful study has been done by
Maurice Levi, Kai Li and Feng Zhang
at the Saunder School of Business
looking into the effects of
testosterone on decisions made by
CEO’s of companies in regards to
mergers and acquisitions. The study,
titled “Deal or No Deal: Hormones
and the Mergers and Acquisitions
Game,”1 used data gathered over a
ten year period to determine
whether testosterone has a that has a strong association with
statistically and economically
significant effect on decision making.
Looking at how testosterone affects
men in their decision-making and
dominance seeking behaviour is not
new. Previously studies have shown
that testosterone has an effect on
decisions in the ‘ultimatum game’, a
well known economic experiment in
which two players decide how to
divide a sum of money, in which the
proposer decides on the split and the
responder chooses whether to
accept or reject the proposed offer,
in case of rejection both get zero.
The optimal decision for the
responder is to accept both high and
low offers; however even with a one
round game (to prevent strategic
behaviour) it has been found that
the responder frequently rejects low
offers, and though fairness plays a
significant part in this there is a
significant positive correlation
between levels of testosterone and
1 Levi, M., Li K., Zhang F. 2010. Deal or No
Deal: Hormones and the Mergers and
Acquisitions Game. Saunder School of
Business. Management Science Vol. 56, No. 9
Sept 2010, pp. 1462-1483
Semester 2 2010
University of Sydney
the rejection rate2. The hormone
testosterone is a steroidal hormone
male dominance seeking,
particularly in a competitive
situation. Influenced by previous
studies of the ultimatum game3 Levi,
Li & Zhang drew some distinct
parallels between the nature of the
ultimatum game and mergers and
acquisitions by looking at the act of
bidding as an act of dominance
seeking by CEO’s. As anyone in the
corporate world knows the role of
CEO and the path to reaching the
position attracts very headstrong,
competitive and dominance seeking
individual and any act that brings
out this dominance creates an
attention-grabbing research topic.
Studying the effects of testosterone
on CEO decisions in mergers and
acquisitions however is much more
complex than the simple ultimatum
game, with a significant difference
being the opportunity in this
situation to respond to offers and for
CEO’s to propose counter offers. To
examine these effects more closely
2Burnham, T.C. 2007. High-testosterone
men reject low ultimatum game offers. Proc.
Roy. Soc. Ser. B 274(1623) 2327-2330
3Particularly Burnham’s version (see
previous footnote)
Tatiana Nikiforova Behavioural Economics
the study looked at data from
acquisition bids between 1997 and
2007 obtained from Thomson’s SDC
database, data from almost 5000
bids was cut down to just under 400
by taking into account only
significant bids worth over 5% of
firm value, removing bids where the
bidders toehold was less than 50%
and removing data of bids in which
other factors could significantly
skew the results. The significant
findings were that young CEO’s,
defined as being under 45, were 4%
more likely to initiate an acquisition,
20% more likely to withdraw an
offer and 2% more likely to force
bidders into a tender offer. Though
2% and 4% may seem small the
numbers are statistically significant
when remembering that trillions of
dollars worth of mergers and
acquisitions are negotiated annually
in the USA where the study was
done. Thus it becomes easy to see
how a small deviation in percentage
terms can cause significant value
loss for a firm. This highlights the
importance of having a good,
experienced, board of executives to
advice and guide the CEO towards
making correct decisions that don’t
destruct value in a firm.
It’s also important to note that 45
isn’t a clear cut line between CEO’s
who are affected by testosterone and
those who aren’t, the study
compared young CEO’s with their
older counterparts looking at the
effect of age in 5 year intervals, a
hierarchal effect for age was found.
Target companies board size, the
target proportion of independent
directors, the target sales growth,
target Tobin’s Q4 and other controls
were also tested for significance,
4 Diversity. Saunder School of Business
Semester 2 2010
University of Sydney
however the youth of the bidding
male CEO was found to be the most
significant and interesting result in
this study.
Unable to take mouth swabs directly
from CEO’s the researchers used age
as a proxy for testosterone, however
this begs the question – couldn’t it
simply be the inexperience of the
younger CEO’s leading to
unfavorable decisions? Using tenure
as a proxy for experience
researchers found that even after
taking experience into account age
was still a significant factor for bid
withdrawal and the use of tender
offers, indicating that age was not a
proxy for experience or horizon and
was in fact a good proxy for
testosterone. The research relies
heavily on previous studies that
have shown testosterone levels to be
negatively correlated with age, and it
is argued in the paper that even if
testosterone levels are exceptionally
high or low to begin with previous
studies have shown levels diminish
with age regardless of lifestyle and
other factors.
The new findings are interesting to
look at alongside previous research5
done by the group that found
women are more risk averse, have
lower bid premiums and lower
chances of forcing a tender offer.
Combining these findings paints an
interesting picture on how board
composition and gender and age
diversification impacts on a firm’s
decisions and resulting returns. It
would be interesting to see this
research developed further to look
at how decisions in mergers and
acquisitions are affected by
participants of different genders,
5Levi, M., Li K., Zhang F. 2008. Mergers and
Acquisitions: The Role of Board Gender
Tatiana Nikiforova Behavioural Economics University of Sydney

particularly with an increasing

number of women rising to
executive positions in the workforce.
How chivalrous are the gentlemen
when their dominance is challenged?

The ageing population and imminent

retirement of baby boomers is
resulting in the proportion of young
CEO’s increasing. If in fact the
conclusions of the findings are
correct and age is a proxy for
testosterone there may be a
significant amount of value
destruction occurring in the near
future when the young men take
over our companies – however with
value destruction always comes the
opportunity to create value.

Though interesting the research is

unsurprising, the sample selection
was limited to high-testosterone
individuals motivated by a drive for
dominance and competition and the
results supported that the
testosterone did in fact have an
effect on their decision making. The
conclusion that testosterone was the
major effect on this isn’t conclusive,
and the researchers themselves
admit this, however finding CEO’s
willing to be tested for testosterone
is no small challenge. The results
emphasise the effect of ‘animal
instincts’ on economies shouldn’t be
underestimated, maybe next time
your boss is making a stupid
decision ask him for a mouth swab.

Semester 2 2010
Tatiana Nikiforova Behavioural Economics University of Sydney

Bibliography;
Selected Paper:

Levi, M., Li K., Zhang F. 2010. Deal or No

Deal: Hormones and the Mergers and
Acquisitions Game. Saunder School of
Business. Management Science Vol. 56, No. 9
Sept 2010, pp. 1462-1483

Others Mentioned:

Burnham, T.C. 2007. High-testosterone men

reject low ultimatum game offers. Proc. Roy.
Soc. Ser. B 274(1623) 2327-2330

Levi, M., Li K., Zhang F. 2008. Mergers and

Acquisitions: The Role of Board Gender
Diversity. Saunder School of Business
(unpublished)

Semester 2 2010