The Effect of Cultural Values on Mergers Around the World

LOST IN TRANSLATION? THE EFFECT OF CULTURAL VALUES ONMERGERS AROUND THE WORLD

KENNETH R. AHERN

a

, DANIELE DAMINELLI

b

, AND CESARE FRACASSI

c

Abstract

This paper studies the effects of national culture on merger volume, synergy gains, and the negotiationprocess in domestic and cross-border mergers. Controlling for language, geography, legal origin and othercharacteristics, the volume and abnormal returns of domestic mergers are significantly higher in countrieswhere people are more trusting of others. In cross-border deals, the volume and gains from mergers aresmaller when countries are more culturally distant. In addition, culture affects merger negotiations. Firmsthat are more trusting and individualistic capture a larger share of combined gains and the use of terminationfees, tender offers, and the form of payment vary systematically by cultural differences.

First draft: 15 November 2009This version: 11 March 2010

Keywords

: Mergers & Acquisitions, Cultural Values, International, Bargaining

JEL Classiﬁcations

: G34, M14, Z1

We thank Sreedhar Bharath, Jonathan Carmel, Antonio Macias, Paige Ouimet, Amiyatosh Purnanandam, Uday Ra- jan, Mike Stegemoller, Yuhai Xuan, Yishay Yafeh, and seminar participants at the University of Michigan and theUniversity of Texas-Austin for helpful comments.

a

University of Michigan, Ross School of Business, 701 Tappan Street, Ann Arbor MI 48109-1234. Telephone: (734)764-3196. E-mail: kenahern@umich.edu.

b

Politecnico di Milano, Department of Management, Economics, and Industrial Engineering, Via Lambruschini 4,20156 Milan, Italy; Telephone: +39 0223992805; E-mail: daniele.daminelli@polimi.it.

c

University of Texas at Austin, McCombs School of Business, 1 University Station B6600, Austin TX 78712. Tele-phone: (512) 232-6843. E-mail: cesare.fracassi@mccombs.utexas.edu .

Lost in Translation? The Eﬀect of Cultural Values on Mergers Around the World

Abstract

This paper studies the effects of national culture on merger volume, synergy gains, and the negotiationprocess in domestic and cross-border mergers. Controlling for language, geography, legal origin and othercharacteristics, the volume and abnormal returns of domestic mergers are significantly higher in countrieswhere people are more trusting of others. In cross-border deals, the volume and gains from mergers aresmaller when countries are more culturally distant. In addition, culture affects merger negotiations. Firmsthat are more trusting and individualistic capture a larger share of combined gains and the use of terminationfees, tender offers, and the form of payment vary systematically by cultural differences.

LOST IN TRANSLATION? CULTURAL VALUES AND MERGERS 1

According to neoclassical theory, mergers move assets to their most efficient use. Empiricalevidence from the U.S. merger market provides strong evidence consistent with this hypothesis(Maksimovic and Phillips,2001;Andrade, Mitchell, and Stafford,2001). However, recent research shows that national legal and regulatory institutions in foreign countries impose considerable fric-tions on efficient asset transfers.Rossi and Volpin(2004) show that countries with less transparent accounting standards and weaker shareholder-rights laws have less active domestic merger markets.Other studies find that cross-border merger gains vary systematically with legal systems (Moellerand Schlingemann,2005) and corporate governance laws (Bris and Cabolis,2008; Martynova and Renneboog,2008). Since foreign mergers account for the majority of worldwide M&A activity, moreresearch on the role of national institutions in worldwide merger activity is critically important.In this paper we investigate the effect of a different type of institution: national culture. Usinga large sample of mergers from 52 countries over 1991–2008, we find that culture is a criticaldeterminant of both the size and the division of gains created in domestic and cross-border mergers,as well as how deals are structured. These results are consistent with recent research that findsstrong connections between national culture and economic outcomes. For example, evidence fromexperiments using participants from a multitude of cultures reveals that deep-seated values of fairness, trust, and individualism affect fundamental economic decisions (Henrich,2000, Barr et al., 2009). In cross-cultural experiments, the surplus from trade is reduced when participants do notshare similar cultural values (Brett et al.,1998, Adair et al., 2004). Evidence from non-experimentalsettings confirms the importance of culture on economic decision-making: Bilateral trust increasescross-border trade (Guiso, Sapienza, and Zingales,2009a), stock price momentum is greater in countries where individualism is higher (Chui, Titman, and Wei,2009), countries where people are more trusting have greater stock market participation (Guiso, Sapienza, and Zingales,2009b), national culture is related to risk-taking by firms (Griffin, Li, Yue, and Zhao,2009), and interest rates are lower when borrowers share common cultural values with lenders (Giannetti and Yafeh,2009). Though there is abundant anecdotal evidence of culture clash in mergers (Daimler-Chrysler,for example), there is surprisingly little academic research on the topic.We empirically explore the role of national culture in two key aspects of domestic and cross-bordermergers: 1) the value created through M&As, and 2) the negotiation process and the division of