Home Bias in Corporate Investments: Evidence from U.S. Domestic M&A

Abstract

In this paper, we first document that firms exhibit a strong in their M&A deals and identify some of the factors that drive this bias. We examine the spatial distribution of a sample of about 15,000 U.S. domestic M&A deals announced by public acquirers during 1990-2003. The key findings of the paper are summarized as follows: First, nearly a quarter (half) of sample targets are located within a 100 (900) kilometer radius from acquirers' locations, with the frequency of deals declining sharply as the distance between targets and acquirers increases. Firms exhibit behavior that is strikingly similar to the well-documented exhibited by portfolio investors. Second, when the state, rather than the geographical distance, is used as an observation unit, we again observe a strong home bias - firms tend to acquire a disproportionate number of targets in the home states. For example, while targets domiciled in Wisconsin account for 1.39% of the total number of sample targets, they account for 32.63% of the total acquisitions by Wisconsin firms. After the home state, the most popular target states for the Wisconsin acquirers are Illinois and Minnesota, displaying a near-home as well as home bias. Third, logistic regression analyses show that the propensity to acquire in-state targets is positively related to the size of the domicile state of the acquiring firm, reflecting the opportunities at home, and negatively related to the severity of anti-takeover statutes endorsed by the home state of the acquirer. Thus, state-level laws matter in determining where M&A takes place. Mitigating the home-state bias in M&A, anti-takeover statutes have an unexpected effect of integrating the market for corporate control. Further, good macroeconomic conditions like the level of IPO activity and the interest rate both are found to negatively affect the propensity to acquire in-state targets, possibly by affecting the acquirer's risk attitude and the cost of funding. Fourth, the propensity to acquire in-state is negatively (positively) related to the acquirer firm size and book-to-market ratio (debt ratio). Banks, oil and petroleum companies show a higher propensity for in-state M&A, while telecom and construction companies make more out-of-state acquisitions. Ceteris paribus, public targets are more likely to be acquired by home-state firms than private targets, possibly due to the political resistance to out-of-state takeover of public firms that tend to be more visible and vital to the state economy. The results are similar when we alternatively use multinomial logistic regression analyses based on geographical distance.