Geographic Variation in M&A Activity, Spillovers, and Valuation Shocks

Abstract

We document large and persistent differences in the acquisitiveness of firms in the U.S. based on the location of their headquarters. We hypothesize and find evidence that local peer effects in M&A activity contribute to such persistence. Specifically, the acquisitiveness of non-dominant industry firms in an economic area (EA) relates positively to valuations and idiosyncratic return shocks of local dominant industry firms. Local spillover effects are stronger for firms headquartered in EAs with higher M&A activity and dominant industries in these EAs are subject to larger positive valuation shocks. Overall, our results suggest that firms perceive the valuations of their local peers as informative for their acquisition decisions. The market seems skeptical with respect to firms responding to local peer valuation shocks as we find an inverse relation between announcement returns and idiosyncratic returns shocks of their local dominant industry peers.