Firms of a feather merge together: Information flows, familiarity bias and M&A outcomes

Description

We show that cultural proximity between the boards of two firms increases the likelihood of those firms engaging in a merger and acquisition (M&A) deal in India. This phenomenon may reflect firms’ reliance on cultural ties—proxied by caste—as an informal channel of information when making critical investment decisions under conditions of imperfect information. However, it may also be driven by familiarity bias, leading to suboptimal investment outcomes. Indeed, we find that caste-proximate M&A deals tend to be value-destroying for both the acquiring and target firms, as well as for the merged entity. There is no evidence of wealth transfer from acquirers to targets, nor is there a significant reduction in deal completion time, suggesting that any perceived trust among directors sharing similar caste identities does not improve the negotiation process. Overall, our findings indicate that familiarity bias in favor of culturally proximate actors can result in suboptimal investment decisions.

Publication Date

1-1-2018

Publisher

University of Chicago

Keywords

Investment, Information, Mergers and acquisitions, Corporate governance, Cultural economics

Conference

Chicago Booth-India Quantitative Marketing Conference: 17th December, 2018, IIM Bangalore

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