Marriage of Opposites? Social Capital Differences in Mergers and Acquisitions

Abstract

This paper studies the role of regional cultural differences in M\&A transactions in the U.S. We construct a county-level measure of cultural trust based on the World Values Survey data and find that a larger social trust distance between two companies reduces the likelihood of them combining via an M\&A transaction. Conditional on the deal being announced, a larger social trust distance between the acquirer and the target results in lower completion rates and longer completion times, indicating a higher complexity in deal execution. However, we also find that a larger social trust distance is associated with higher gains from mergers, as measured by both acquirer and combined announcement returns as well as medium-term buy-and-hold abnormal returns. The result suggests that for these announced deals, the synergy potential is high enough to offset the costs induced by the large cultural distance.