Acquisitions and Relational Management Practices

Abstract

Can ownership changes trigger the development of relational management practices and, through this channel, improve performance of inefficient establishments in difficult institutional environments? We address this question by studying the effects of mill acquisitions in the Rwandan coffee industry, where relational contracts play an important role due to weak contract enforcement in rural areas. Processing coffee cherries into parchment coffee is simple but not easy: it relies on standardized technology and a simple production process, yet requires non-contractible inputs from mill managers, workers, and farmers. As a result, there are large and persistent performance differences across mills, even though underperforming owners know what needs to be done and attempt to improve performance. Using administrative panel data and a survey panel of mills, we estimate difference-in-differences specifications and find that mill performance increases following an ownership change, with larger effects for foreign acquirers. We also conduct an original survey of acquirers that allows us to construct acquirer- and target-specific control groups, and show that results hold when controls are based on other mills the acquirer considered purchasing. We further find that managers in acquired mills are granted more autonomy, do not attempt more changes, but are more successful in implementing those they attempt. These findings align with field interviews showing that acquirers improve managerial practices, particularly those relying on relational contracts. Finally, we do not observe systematic replacement of managers with higher-ability ones, differences in capital investment, or access to cheaper inputs. We conclude that relational management practices play an important role in enhancing coffee mill performance in this setting.