Geographic proximity and cross-region merger and acquisitions: Evidence from the opening of high-speed rail in China

Abstract

Using the opening of high-speed rail (HSR) services in China as a natural experiment, we examine whether the exogenous increase in geographic proximity facilitates firms in making cross-region merger and acquisition (M&A) decisions. We argue that the opening of HSR can reduce the degree of distance-induced information asymmetry between bidders and targets by reducing travel time and costs. Using the multi-period differences-in-differences (DID) model, we find that the number of firms being targeted by non-local bidder firms significantly increases following the opening of HSR in the local city. The result is robust to the inclusion of control variables, alternative measures, different model specifications, and a propensity score matching DID model. Further analyses show that the effect of HSR on facilitating cross-region M&As is more pronounced when non-local bidder firms rely more on HSR in acquiring information about the distant target firms. In addition, we find that non-local bidder firms benefit from the opening of HSR by having superior post-merger performance, suggesting that the increased geographic proximity due to the opening of HSR leads to more efficient resource allocation decisions by firms.