Directors 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) transaction in India. This pattern may reflect firms’ reliance on shared cultural identity—proxied by caste—as an informal channel of information when making high-stakes investment decisions under conditions of uncertainty. 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. This suggests that perceived trust among directors with similar caste identities does not confer measurable benefits during the negotiation process. Overall, our findings indicate that familiarity bias in favor of culturally proximate actors can lead to inefficient investment decisions.

Publication Date

1-1-2018

Publisher

NSE - NYU Stern School of Business

Keywords

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

Conference

NSE-NYU Conference on Indian financial markets, 10-11 December, 2018, Mumbai

This document is currently not available here.

Share

COinS