Regional Culture 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 use that to measure cultural differences. We find that a larger cultural distance between two companies reduces the likelihood of them combining via an M&A transaction. Conditional on the deal being announced, a larger cultural 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 larger cultural distance is associated with higher gains from mergers, as measured by both acquirer and combined announcement returns as well as mediumterm 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.