Journal of Banking and Finance 149 (2023) 106759

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Journal of Banking and Finance

journal homepage: www.elsevier.com/locate/jbf

Social trust distance in mergers and acquisitionsR

Tse-Chun Lin a, Vesa Pursiainen b,∗
a
The University of Hong Kong, Hong Kong
b
University of St. Gallen and Swiss Finance Institute, Switzerland

a r t i c l e i n f o a b s t r a c t

Article history: We study the role of regional cultural differences in M&A transactions in the U.S. A larger social trust
Received 6 January 2021 distance between two companies reduces the likelihood of them combining via an M&A transaction and
Accepted 6 January 2023
results in lower completion rates and longer completion times, indicating higher complexity in deal ex-
Available online 20 January 2023
ecution. However, a larger social trust distance is also associated with higher gains from mergers, as
JEL classification: measured by acquirer and combined announcement returns and medium-term buy-and-hold abnormal
A13 returns. This suggests that for these announced deals, the synergy potential is high enough to offset the
D71 costs induced by the large cultural distance.
G34
M14
© 2023 The Author(s). Published by Elsevier B.V.
Z1 This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/)

Keywords:
Mergers and acquisitions
Cultural difference
Trust
Social capital
Synergies

1. Introduction
Culture matters for economic activity, and one essential dimen-
sion of culture is social trust.1 LaPorta et al. (1997) show that trust
is important for the existence and operation of large organizations.
Bloom et al. (2012) find that trust increases aggregate productiv-
ity by affecting the organization of firms and allowing them to
decentralize their operations. In mergers and acquisitions (M&A),
Ahern et al. (2015) find that larger differences in national cul-
ture are associated with lower M&A volumes and lower synergy
R
We appreciate the helpful comments from Geert Bekaert (Editor), two anony-
mous referees, Utpal Bhattacharya, Kai Li, Camille Mueller, Gordon Phillips, Chishen
Wei, Xiaoyun Yu, the conference participants at FMA Asia/Pacific 2018 and Asia
Meeting of the Econometric Society 2017, and the seminar participants at the Uni-
versity of Hong Kong. We are immensely grateful to Kai Li, Feng Mai, Rui Shen
and Xinyan Yan for sharing their corporate culture data. Tse-Chun Lin gratefully ac-
knowledges research support from the Faculty of Business and Economics at the
University of Hong Kong. All errors are ours.
∗
Corresponding author.
E-mail addresses: tsechunlin@hku.hk (T.-C. Lin), vesa.pursiainen@unisg.ch (V.
Pursiainen).
1
Arrow (1972) notes that trust is essential for virtually any commer-
cial activity. Guiso et al. (2009) show that cultural trust facilitates trade.
Guiso et al. (2008) find that cultural trust is important for stock market partici-
pation. Levine et al. (2018) find that firms in high-trust countries are more resilient
to banking crises by obtaining more trade credit.
gains for the deals that take place. These studies, like most studies
of cultural differences, focus on national culture. This is likely in
part because of the available sources of data, the most important
of which is the World Values Survey (WVS).2 While the richness
of cultural data is helpful, the potential drawback of international
comparisons is that other differences between countries may be
correlated with the measures of culture.
Our paper studies the role of regional cultural differences in
M&A in the U.S. and thus alleviates the aforementioned concerns.
We develop a novel instrument-like methodology to construct an
estimate of cultural trust for each U.S. county, based on the re-
gional WVS trust data but allowing more granular analysis than the
nine U.S. Census regions included in the survey. We then use these
cultural trust estimates as a key dimension of local culture and ask
(i) whether combinations of firms headquartered in counties with
larger social trust distance are less likely to be pursued and agreed,
(ii) whether such combinations encounter additional complications
in deal execution, reflected in completion rate and time, and (iii)
whether these cultural differences are associated with differences
in the performance of M&A deals. Our evidence suggests that social
trust distance is associated with a lower likelihood of M&A deals
happening and higher deal complexity. We also find that higher
2
This survey produces comparable and nationally representative data in nearly
100 countries.

https://doi.org/10.1016/j.jbankfin.2023.106759
0378-4266/© 2023 The Author(s). Published by Elsevier B.V. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/)
T.-C. Lin and V. Pursiainen
social trust distance is associated with higher announcement re-
turns and medium-term stock returns.
To construct our county-level measure of cultural social trust,
we first leverage the social capital literature to identify three key
proxies of regional social capital. The measures we use, including
(i) association density, (ii) tax-exempt non-profit organizations per
capita, and (iii) voter turnout rates in presidential elections, are the
same that Rupasingha et al. (2006) use to construct a regional so-
cial capital index.3 We then regress the World Values Survey mea-
sure of cultural trust, reported for the nine U.S. Census regions,
on these three county-level determinants, including year fixed ef-
fects, and use the estimated values from that regression as our
proxy for county-level cultural trust.4 Although our methodology
for estimating county-level trust looks like instrumental variables
estimation, we are not using it to solve any potential endogeneity
concerns. Our intention is merely to aggregate the variation in our
county-level determinants into a single index that is directly linked
to cultural trust. Compared to measures of national culture, our
measure of regional cultural trust in the U.S. has some noteworthy
advantages. First, as a county-level variable, it offers much more
cross-sectional variation than measures of national culture.5 Sec-
ond, it allows us to focus on domestic U.S. M&A deals and hence
removes or mitigates a number of confounding factors inherent in
international studies.6 The data we use for calculating the trust
measure for U.S. counties are available from 1995 onwards, so our
analysis includes all domestic U.S. acquisitions in 1995–2014 where
we have location and other required data available.
For our measure to be a valid county-level indicator of cultural
social trust, there needs to be a link between these three com-
monly used proxies for social capital and the general level of trust.
The social capital literature provides ample evidence of such a link.
For example, Guiso et al. (2004) show that social capital is es-
sential for financial development that requires trust-intensive con-
tracts. In the context of firm behavior, Hasan et al. (2017b) find
that firms headquartered in U.S. counties with higher levels of so-
cial capital incur lower bank loan spreads, looser other loan terms,
and lower at-issue bond spreads. They conclude that debthold-
ers perceive social capital as providing environmental pressure
constraining opportunistic firm behaviors in debt contracting.
Similarly, Hasan et al. (2017a) find a negative association be-
tween social capital and corporate tax avoidance, while Jha and
Chen (2015) find that companies headquartered in high-social-
capital counties are perceived as more trustworthy by their audi-
tors, reflected in lower audit fees.7
Our first hypothesis is that a larger social trust distance be-
tween two companies reduces the likelihood of them combining
via M&A. The economic intuition is straightforward, as cultural dif-
ferences are likely to make both M&A negotiations and combin-
ing companies operationally more complicated. The hurdle for ex-
pected synergies to overcome the complexities of merging is thus
high enough for CEOs to abandon some deals. It is also consistent
3
Rupasingha et al. (2006) also include a fourth component, census response rate,
which we exclude due to lack of availability on a consistent and frequent basis.
4
This measure is based on the question “Generally speaking, would you say that
most people can be trusted or that you need to be very careful in dealing with
people?” and has been used extensively in the prior literature to measure cultural
trust in the international context. Studies using it include LaPorta et al. (1997);
Sapienza et al. (2013), and Ahern et al. (2015), among many others.
5
There are 3142 counties and county-equivalents in the U.S., while even the most
extensive international studies are limited to a few dozen countries.
6
These might include differences in institutions, legal framework, language, edu-
cation system, and information environment.
7
As an additional reassurance that the three determinants of social capital are
relevant for cultural trust, the estimates we obtain when regressing the WVS trust
measure on these three variables are highly statistically significant for all three. The
results are discussed in more detail in the Internet Appendix.
2
Journal of Banking and Finance 149 (2023) 106759
with the findings of Ahern et al. (2015), who show that differences
in national culture reduce cross-border M&A deal volumes. Unlike
Ahern et al. (2015), we test this hypothesis by using a methodology
similar to that of Bena and Li (2014) by first constructing matched
control groups for each target and acquirer and then using logit
regressions to test for the relationship between cultural distance
and merger pairing likelihood. Our results provide strong support
for this hypothesis. Social trust distance is associated with a signif-
icantly lower likelihood of two firms combining via a merger, and
this difference is statistically significant across all model specifica-
tions and for all control groups. This result is also robust to con-
trolling for a number of acquirer and target characteristics, as well
as geographic distance and similarity of industry. Moreover, the re-
sults are qualitatively similar when including deal fixed effects in
our regression analysis. A one-standard-deviation increase in social
trust distance is associated with an 11% lower likelihood of merger
pairing.
With a similar reasoning, our second hypothesis predicts that a
larger social trust distance makes the due diligence process and
merger execution more challenging and time-consuming, result-
ing in lower completion rates and longer completion times of
M&A transactions. Our results are consistent with the hypothe-
sis. For announced deals, a larger cultural distance between the
target and the acquirer is associated with significantly lower deal
completion rates and longer deal completion times. Cultural dis-
tance is negatively related to the hazard rate of deals, indicat-
ing an increase in the deal completion time, while OLS regres-
sions indicate a positive relationship between cultural distance
and deal completion time. These results are statistically signifi-
cant across different model specifications and robust to control-
ling for a number of factors, including year, industry, and county
fixed effects. A one-standard-deviation increase in cultural distance
results in 0.5-percentage-point decrease in completion rate. This
translates into a 9.3%-increase in transactions that are withdrawn
after announcement. Similarly, a one-standard-deviation increase
in social trust distance is associated with 3.3% longer completion
times.
As our third hypothesis, we explore whether social trust dis-
tance is related to merger gains, as measured by acquirer and com-
bined announcement returns and medium-term buy-and-hold re-
turns. We do not have a strong prior on the direction of this re-
lationship, as there are plausible arguments both ways. First, a
difference in regional culture could serve as an additional hurdle
for negotiating and executing a deal – and complex deals may re-
quire more effort from the management. Therefore, such deals may
be pursued only if the expected rewards are higher. Second, cul-
tural diversity might be positive for company performance if it fa-
cilitates new ideas and new ways of doing things. Furthermore,
the prior literature suggests that a higher level of trust can fa-
cilitate productive activity.8 It is thus plausible that there could
be synergy effects from a combination with a higher-trust com-
pany.9 On the other hand, the existing and concurrent studies have
found a negative relationship between merger gains and differ-
ences in national culture Ahern et al. (2015) as well as corporate
culture (Li et al., 2021). We find that a larger social trust distance
is associated with significantly higher acquirer announcement re-
turns, combined announcement returns, and three-year buy-and-
hold-abnormal returns (BHAR) over matched control firms. A one-
standard-deviation increase in cultural distance results in a 0.3%
increase in 7-day acquirer cumulative announcement return (CAR
(−3, 3)) and a 0.5% increase in combined CAR. Moreover, a one-
8
E.g., Durlauf and Fafchamps (2005); Bloom et al. (2012).
9
Prior literature provides suggestive evidence of such productivity spillovers (e.g.,
Mas and Moretti, 2009).
T.-C. Lin and V. Pursiainen
standard-deviation increase in cultural distance results in a 4.8%-
point increase in three-year BHAR. The results support the notion
that M&A deals with large social trust distance are likely to take
place only when the value creation or synergy potential is high
enough.
To make sure that our findings on M&A decisions and social
trust distance are not driven by other county or firm characteris-
tics that might be correlated with regional social trust, we perform
a number of robustness check analyses. We find that our merger
pair results are robust to controlling for differences in the machine
learning-based corporate cultural values of Li et al. (2021) as well
as differences in various county characteristics, including the level
of urbanness, population, racial composition, and political leaning.
We also find that the effect of social trust distance is similar re-
gardless of whether the target or the acquirer is from a higher-
trust county – i.e., the direction of the difference does not seem
to matter. Finally, we also show that our findings are qualitatively
similar when using a PCA-based social capital index, similar to the
methodology used by Rupasingha et al. (2006), instead of our main
measure of cultural trust.
We make several contributions. First, to our knowledge, our pa-
per is the first study focusing on the role of regional cultural trust
in the context of M&A. We thus add to the understanding of the
determinants of M&A deal outcomes and performance, in particu-
lar the role of informal institutions in determining M&A activities.
Our paper is related to Van den Steen (2010), who models the ef-
fects of cultural clash in M&A, and to Graham et al. (2022), who
find that most executives consider cultural differences could be a
deal breaker. Our paper is closely linked to Ahern et al. (2015),
who find that larger differences in national culture are associ-
ated with lower M&A volumes between countries and lower com-
bined announcement returns. Our paper is also closely related to
Li et al. (2021), who find that firms closer in cultural values of in-
novation, integrity, quality, respect, or teamwork, are more likely to
do a deal together. Our paper differs from and complements these
studies as our focus is on regional cultural differences in social
trust, while theirs are on the national and corporate culture dif-
ferences, respectively. Moreover, our paper is related to the study
by Bonini and Vaidya (2022), who argue that homophily between
CEOs facilitates trust and affects M&A outcomes between the firms
they manage.
Our paper also contributes to the broader literature on the im-
pact of culture and trust on economic activity. There is a grow-
ing recognition that networks of relationships and communities
around individuals and organizations have an impact on their be-
havior through social norms and moral attitudes (e.g., Hirshleifer,
2015; Zingales, 2015). Such forms of social organization – social
capital – generate trust and reciprocity, impose behavioral norms,
and hence facilitate cooperation.10 A vast literature on social cap-
ital argues that social networks and social norms have significant
economic consequences, with higher regional social capital asso-
ciated with better economic performance (e.g., Knack and Keefer,
1997; Putnam, 1993; Temple and Johnson, 1998; Helliwell and
Putnam, 1995), improved flow of information (Barr, 20 0 0; Tiepoh
and Reimer, 2004), more effective governance (e.g., Putnam, 1993;
Bowles and Gintis, 2002; Knack, 20 02; Pierce et al., 20 02), and in-
creased innovation (Fountain, 1998; Laursen et al., 2012). We in-
troduce a novel way to measure county-level cultural trust in the
U.S. that enables a more granular analysis and could also be used
in other contexts.
10
The introduction of the term “social capital”, popularized
Coleman (1988) and Putnam (1993), is usually credited to Bourdieu (1979,
1980). Durlauf and Fafchamps (2005) provide an extensive overview of the social
capital literature prior to 2005.
Journal of Banking and Finance 149 (2023) 106759
2. Hypothesis development
2.1. Trust and culture in M&A
The role of culture in corporate finance has also gener-
ated a fast-growing literature. LaPorta et al. (1997) show that
cultural trust is important for the existence and operation of
large organizations. Similarly, Bloom et al. (2012) find that trust
increases aggregate productivity by affecting the organization
of firms and allowing them to decentralize their operations.
Levine et al. (2018) find that liquidity-dependent firms in high-
trust countries obtain more trade credit and suffer smaller drops
in profits and employment during banking crises than similar firms
in low-trust economies. Ang et al. (2015) find evidence that foreign
high-tech companies investing in China prefer to invest in regions
where local partners and employees are considered more trustwor-
thy; they are also more likely to establish joint ventures and to
make greater research and development investments.
Specifically for M&A, Ahern et al. (2015) find that larger dif-
ferences in national culture are associated with lower M&A vol-
umes between countries and lower combined announcement re-
turns for deals that take place. They measure national culture
based on data from the World Values Survey, focusing on three
key dimensions: trust, hierarchy, and individualism. Their results
suggest that international differences in cultural trust have a sig-
nificant negative impact on both M&A volumes as well as synergy
gains. Li et al. (2021) apply machine learning techniques on earn-
ings conference call transcripts to identify several aspects of cor-
porate culture and find that firms with similar cultures are more
likely to merge. They also find some evidence of smaller gains
from culturally distant mergers, although this evidence is some-
what mixed.
Intuitively, social trust distance is likely to make both negotiat-
ing as well as executing a merger involving two companies more
complicated and more time-consuming. This can make it less likely
for the management and shareholders of the companies to pursue
M&A deals with large cultural differences between the companies,
and for those combinations that are pursued, less likely to reach an
agreement on a merger or an acquisition. Similarly, for those com-
binations that do get agreed, a larger social trust distance should
reflect more complex deal execution and hence increase both the
completion time as well as the likelihood of the deal being with-
drawn before completion.
Based on these observations, our first two hypotheses are:
Hypothesis 1. A larger social trust distance between two compa-
nies reduces the likelihood of them combining via M&A.
Hypothesis 2. A larger social trust distance between the target and
the acquirer is associated with lower completion rates and longer
completion times of M&A transactions.
For announced M&A transactions, it is not clear ex ante
whether social trust distance should be associated with higher
or lower merger gains. If a larger cultural distance makes a deal
more complicated, it also represents a hurdle that needs to be
worth overcoming for the deal to be pursued. In particular, the ac-
quiring managers may be reluctant to pursue complicated deals,
even if they are worthwhile doing for expected shareholder value.
This conjecture is consistent with the prior literature document-
ing managers’ tendency to avoid working hard when possible (e.g.,
Bertrand and Mullainathan, 2003; Hicks, 1935). This would imply
that the deals that get announced are expected to be more at-
by
tractive financially when cultural distance and hence the effort re-
quired to make the deal happen are substantial. Consistent with
this argument, Tremblay (2016) finds that differences in organiza-
3
T.-C. Lin and V. Pursiainen
tion culture result in higher combined announcement returns and
gains in operating performance.
On the other hand, larger differences in national and organi-
zation cultures may lead to adverse deal performance. For ex-
ample, Ahern et al. (2015) find that differences in national cul-
ture are associated with lower combined announcement returns.
Li et al. (2021) find similar results for differences in corporate cul-
ture. Weber et al. (1996) find that the impact of differences in
corporate culture on post-merger performance is positive in inter-
national M&A transactions, while the impact of differences in na-
tional culture is negative.
Given the plausible arguments and mixed evidence in either di-
rection, we remain directionally neutral in proposing our third hy-
pothesis:
Hypothesis 3a. A larger social trust distance between the target
and the acquirer is associated with higher merger gains.
Hypothesis 3b. A larger social trust distance between the target
and the acquirer is associated with lower merger gains.
We measure the merger gains by combined announcement re-
turns, acquirer announcement returns, and medium-term buy-and-
hold abnormal returns.
3. Data and methodology
3.1. Measuring social trust
To construct our county-level measure of social trust, we use
methodology that combines data from the World Values Survey
and commonly used proxies for regional social capital that are
available at the county level. First, we follow the social cap-
ital literature to identify three key indicators of regional so-
cial capital aiming to proxy the density of social networks and
the strength of social norms. We leverage the methodology of
Rupasingha et al. (2006), whose social capital index has been used
in a number of prior studies (e.g. Hasan et al., 2017b; 2017a; Jha
and Chen, 2015).11 Rupasingha et al. (2006) construct their county-
level social capital index using principal component analysis of
four proxies: (i) association density, (ii) tax-exempt non-profit or-
ganizations per capita, (iii) voter turnout rates in presidential elec-
tions, and (iv) Census response rate. We use the first three compo-
nents but exclude the fourth, Census response rate, due to lack of
availability on a consistent and frequent basis. For empirical appli-
cations, a key benefit of these social capital proxies is that they can
be measured without relying on survey data.12 Our paper leverages
the methodology of Rupasingha et al. (2006) by using measures of
associational activity, advocated as an indicator of social capital by
Putnam (1993, 1995, 2001), and voter turnout rates in presiden-
tial elections as an indicator of civic participation. Voter turnout
rates are also used, e.g., by Alesina and La Ferrara (20 0 0) and
Guiso et al. (2004).
The first component, association density, is based on data from
the County Business Patterns (CBP) compiled by the Census Bureau,
and calculated as the number of associations in each county, di-
vided by population. Similar to Rupasingha et al. (2006), we in-
clude ten different types of associations: civic and social organi-
zations, bowling centers, golf courses and country clubs, fitness
and recreational sports centers, sports teams and clubs, religious
organizations, political organizations, labor unions and similar la-
bor organizations, business associations, and professional organi-
11
At the time of this writing, the Rupasingha et al. (2006) index data can be
downloaded from http://aese.psu.edu/nercrd/community/social- capital- resources
12
Measuring social capital quantitatively also poses challenges and has generated
debate in the literature (see, e.g., Durlauf, 2002a; 2002b).
4
Journal of Banking and Finance 149 (2023) 106759
zations. This proxy is advocated by, e.g., Putnam (1993), to mea-
sure social capital. The second component, registered organization
density, is calculated as the number of charitable non-profit orga-
nizations per capita, using data obtained from the National Center
for Charitable Statistics (NCCS). The third component is the voter
turnout rate in the most recent presidential election. As noted by
Guiso et al. (2004), there are neither legal nor economic incentives
to vote, so the voting decision is mostly driven by social pressure
and internal norms.
Using these three proxies, we develop a methodology to cal-
culate a U.S. county-level trust index. The limitation of the stud-
ies using the Rupasingha et al. (2006) social capital index, or any
similar proxy for social capital, is the lack of a direct link to so-
cial trust. As discussed above, a number of studies find suggestive
empirical evidence of this link, but there is no obvious direct con-
nection from these proxies to how much people trust each other.
On the other hand, the World Values Survey (WVS), a standard
source of data for international cultural comparisons, includes a
direct survey-based measure of trust for the nine U.S. Census re-
gions.13 However, these data are too aggregated to be precise for
cross-sectional domestic studies. Hence, we aim to utilize the ben-
efits of both approaches, the county-level variation in the three
proxies for social capital, and the direct measurement of trust by
the World Values Survey.
We construct a dataset of county-year observations for each of
the three social capital proxies and perform a regression analysis
with the WVS Census region trust measure as the dependent vari-
able. We include year dummies in the regression to capture the
potential time trends of trust level that are not explained by the
social capital proxies. The results of the regression are shown in
the Internet Appendix. We then use the estimated values from this
regression for each county-year observation as a measure of cul-
tural trust for firms headquartered in these counties. The outcome
is a cultural trust index that captures the county-level variation
proxied by the three generally accepted proxies of social capital
and links that to the trust measure in the WVS. The resulting index
values by county are illustrated in Fig. 1. A more detailed presenta-
tion of the different components and a discussion of methodology
is also included in the Internet Appendix.
Three points are worth noting about this measure of cul-
tural trust. First, although our methodology for estimating county-
level trust looks like instrumental variables estimation, we are
not attempting to solve the endogeneity problem. What we aim
to achieve is aggregating the variation in our county-level de-
terminants into a single index that is directly linked to cultural
trust. Second, although our trust index is constructed as an esti-
mate from regressing the proportion of people that tend to trust
strangers, we caution against interpreting our estimate as a com-
parable proportion. The reason is that the three determinants only
capture a part of the variation in trust, and therefore the result-
ing values should be thought of as an index proxying for local cul-
tural trust, not as an explicit estimate of the proportion of people
trusting strangers. Third, while we aim to capture differences in
social trust, the three determinants we use are undoubtedly im-
perfect measures of trust and may capture other aspects of culture
as well as other regional differences. This challenge, in our opinion,
is common to most studies of trust and culture more broadly.14
13
This measure is based on the question “Generally speaking, would you say that
most people can be trusted or that you need to be very careful in dealing with
people?” and has been used extensively in the prior literature to measure cultural
trust in the international context. Studies using it include LaPorta et al. (1997);
Sapienza et al. (2013), and Ahern et al. (2015), among many others.
14
To make sure our results are not driven by such other aspects, we show that our
findings are robust to controlling for a large number of other regional differences.
See Internet Appendix Section B.3 for further discussion.
T.-C. Lin and V. Pursiainen Journal of Banking and Finance 149 (2023) 106759

Fig. 1. Cultural trust by county in 2014. Cultural trust estimate by county. Obtained by regressing the World Values Survey trust measure on three common county-level
proxies for social capital: association density, tax-exempt non-profit organizations per capita, and voter turnout rate in presidential elections. The trust estimate is the
expected value from this regression. The methodology is discussed in Section 3.1 and in the Internet Appendix.

3.2. M&A transaction data Table 1

Number of M&A transactions by year. Number of completed and withdrawn
transactions by year included in our M&A sample, categorized into completed
We use M&A transaction data from the SDC Platinum database. and withdrawn deals. Merger pairing sample includes the deals that we are
Our sample includes all domestic U.S. acquisitions of majority in- able to match with control groups for the merger pairing analysis.
terest (at least 50% ownership sought) by listed acquirers with
All announced deals Merger pairing sample
transaction size above $10 million and relative size of at least – Matched deals
1%, announced between 1995 and 2014. We include deals where
Completed Withdrawn All
the SDC data contain either the city and state or alternatively a
zip code for both the target and acquirer, such that we are able 1995 815 70 885 125
1996 916 78 994 116
to match transactions with the corresponding target and acquirer
1997 1195 82 1277 163
counties. We complement the company location data with Compu- 1998 1234 84 1318 181
stat and with 10-K filings from EDGAR where such data is missing 1999 912 73 985 171
in SDC. We obtain stock market data from the Center for Research 2000 715 62 777 120
in Security Prices (CRSP) and accounting data from Compustat. Our 2001 572 41 613 100
2002 527 33 560 60
full sample consists of 13,811 announced M&A transactions. We
2003 562 20 582 90
winsorize all continuous variables at the 1% level. 2004 609 24 633 80
2005 642 17 659 71
2006 670 22 692 81
3.3. Matched control groups for merger likelihood analysis 2007 576 31 607 68
2008 389 40 429 49
2009 291 25 316 46
For our analysis of merger pairing, we construct three matched
2010 398 22 420 54
control groups for each acquirer and each (publicly listed) target in 2011 432 18 450 34
our M&A sample, using a methodology similar to that of Bena and 2012 498 7 505 50
Li (2014). 2013 473 13 486 42
The Random control group includes for each acquirer (target) 2014 604 19 623 52
Total 13,030 781 13,811 1753
five control companies randomly drawn from the Compustat uni-
verse at the time of acquisition. The Industry-Size control group in-
cludes for each acquirer (target) five control companies from the
narrowest SIC code that includes at least five other companies in stantially larger than this sample of public deals matched with
the Compustat universe at the time of acquisition, chosen as the control groups. The main reason is that for many of these tar-
closest matches based on market capitalization. The Industry-Size- gets, the location data is available from SDC but not from Compus-
B/M control group includes for each acquirer (target) five control tat or EDGAR. We exclude such target companies from the merger
companies from the narrowest SIC code that includes at least five pairing sample, as they could not be selected as control firms and
other companies in the Compustat universe at the time of acqui- therefore might introduce a bias to our results. Our final matched
sition, chosen as the closest matches based on a propensity score sample includes 1753 acquirer-target pairs, with matched control
(standard-deviation-weighted distance index based on log market groups for each.
cap and B/M ratio). The control groups for each actual deal in-
clude all possible combinations with the actual merger pair as well 4. Results
as the five matched acquirer controls and the five matched target
controls. 4.1. Sample description
Given the data requirements for this analysis, we can include
from our M&A sample only public targets and the companies for Table 1 shows the number of transactions in our sample by
which we have the necessary location and other data available year. The first three columns show the full sample of announced
on Compustat or EDGAR. It should be noted that in our cross- transactions, categorized into completed and withdrawn deals.
sectional analysis, the sample size including public targets is sub- During the sample period, the level of M&A activity was highest

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T.-C. Lin and V. Pursiainen Journal of Banking and Finance 149 (2023) 106759

Table 2
Summary statistics - Matched control groups. Summary statistics of actual acquirers and actual targets vs. matched control groups.
The Random control group includes for each acquirer (target) five control companies randomly drawn from the Compustat universe at
the time of acquisition. The Industry-Size control group includes for each acquirer (target) five control companies from the narrowest
SIC code that includes at least five other companies in the Compustat universe at the time of acquisition, chosen as the closest
matches based on log market cap. The Industry-Size-B/M control group includes for each acquirer (target) five control companies
from the narrowest SIC code that includes at least five other companies in the Compustat universe at the time of acquisition, chosen
as the closest matches based on a propensity score (standard-deviation-weighted distance index based on log market cap and B/M
ratio). The control groups for each actual deal include all possible combinations with the actual merger pair as well as the five
matched acquirer controls and the five matched target controls. Variables shown with (t − 1) are during or at the end of the fiscal
year prior to the acquisition.

Random Industry-size Industry-size-B/M

Acq. Control t-value Acq. Control t-value Acq. Control t-value

Panel A: Acquirers vs. matched control groups

Trust 0.354 0.352 −2.526 0.354 0.354 0.092 0.354 0.354 −0.015
Mcap (USDbn) (t − 1) 10.239 2.233 −27.577 10.239 5.821 −11.068 10.239 5.794 −11.129
Stock return (t − 1) 0.259 0.175 −5.185 0.259 0.240 −1.243 0.259 0.236 −1.597
Revenue growth (t − 1) 0.249 0.207 −3.128 0.249 0.217 −2.625 0.249 0.222 −2.201
RoE (t − 1) 0.098 −0.016 −11.034 0.098 0.072 −3.559 0.098 0.074 −3.308
Cash holdings (t − 1) 0.120 0.162 8.120 0.120 0.139 4.189 0.120 0.139 4.189
B/M (t − 1) 0.507 0.655 12.185 0.507 0.534 2.879 0.507 0.523 1.789
N 1753 8758 10,511 1753 8749 10,502 1753 8750 10,503

Random Industry-size Industry-size-B/M

Targ. Control t-value Targ. Control t-value Targ. Control t-value

Panel B: Targets vs. matched control groups

Trust 0.351 0.352 1.609 0.351 0.352 1.443 0.351 0.352 1.064
Mcap (USDbn) (t − 1) 1.257 1.793 4.321 1.257 1.156 −1.102 1.257 1.189 −0.734
Stock return (t − 1) 0.144 0.169 1.556 0.145 0.193 3.060 0.145 0.192 3.081
Revenue growth (t − 1) 0.184 0.204 1.510 0.184 0.212 2.115 0.184 0.211 2.072
RoE (t − 1) −0.008 −0.036 −2.292 −0.009 −0.020 −0.984 −0.009 0.000 0.869
Cash holdings (t − 1) 0.154 0.162 1.437 0.154 0.159 0.887 0.154 0.159 0.820
B/M (t − 1) 0.679 0.678 −0.094 0.679 0.664 −1.282 0.679 0.644 −3.171
N 1753 8759 10,512 1751 8727 10,478 1751 8731 10,482

Random Industry-size Industry-size-B/M

Deal Control t-value Deal Control t-value Deal Control t-value

Panel C: Realised transactions vs. matched control groups

|  Trust | 0.016 0.021 10.503 0.016 0.020 8.742 0.016 0.020 8.436
Distance (000 km) 1.091 1.838 24.799 1.089 1.675 18.706 1.089 1.666 18.400
Horizontal 0.605 0.056 −94.186 0.606 0.604 −0.125 0.606 0.604 −0.145
N 1753 61,572 63,325 1,751 61,318 63,069 1751 61,348 63,099

in 1998. The steep decline after the collapse of the dot-com bub-
ble in 20 0 0 was followed by steady growth in M&A volumes until
the financial crisis of 20 08–20 09, which exhibited a significant de-
cline in M&A activity, followed again by a recovery until the end of
the sample period in 2014. The last column shows the number of
deals included in our merger pairing analysis, where we are able
to match both the target and the acquirer with control groups to
study the likelihood of combination.
Table 2 shows summary statistics for the merger pairing sam-
ple of deals matched with control groups. Panel A shows summary
statistics for acquirers vs. matched control groups. We see that ac-
tual acquirers tend to be larger than the matched control firms
in each of the three control groups. Acquirers have, on average,
also experienced higher stock returns, higher revenue growth, and
higher RoE during the prior fiscal year. Acquirers also have lower
cash holdings and B/M ratios than matched control firms. Panel
B shows the same statistics for targets and their matched control
firms. The most significant difference between targets and control
firms is that targets tend to have experienced lower stock returns
and have lower B/M ratios, consistent with Edmans et al. (2012).
Panel C shows the combination variables for actual deals and the
matched control deals.
Table 4 shows summary statistics for our sample of announced
M&A transactions. The mean completion rate in our sample is 94%.
Mean acquirer CAR is 0.7%, and combined CAR 1.7%. Mean buy-
and-hold abnormal return (BHAR) over a three-year holding period
following the closing of the transaction is negative 7.6%. These re-
sults are broadly in line with the prior literature. The average ac-
quirer market cap is $3.5bn, while publicly listed targets have an
average market cap of $1.2bn. Acquirers have on average experi-
enced total share return of 33% in the 12 months before the an-
nouncement, while the corresponding return for listed targets is
17%. The average acquirer M/B ratio is 3.6, compared with 2.9 for
listed targets. The average deal size is $636 million, including non-
public target firms.
The average geographic distance between the target and the ac-
quirer is 1208 km. Cash is used as the sole consideration in 34% of
the deals, and another 17% have mixed cash/stock consideration.
2.0% of the deals in our sample are classified as unsolicited, and
2.3% are challenged. 3.9% of deals are done via tender offers, and
in 2.0% the acquirer has a toehold prior to the announcement. 29%
of targets are publicly listed and 23% are subsidiaries. 59% of deals
are classified as horizontal, meaning that the target and the ac-
quirer have the same 2-digit SIC code.
4.2. Merger likelihood
Our first hypothesis predicts that a larger social trust distance
reduces the likelihood of two companies to combine via M&A. To
test this prediction, we use logit regressions for a sample includ-
ing the actual merger pairs, as well as all possible merger pairs
including the matched control companies for the acquirer and the

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T.-C. Lin and V. Pursiainen Journal of Banking and Finance 149 (2023) 106759

Table 3
Likelihood of merger pairing. The dependent variable, Merger pair, is a dummy taking the value 1 for the actual target-acquirer combination,
and 0 for the matched control group. The control groups are the same as in Table 2. Average marginal effects from logit regressions are
presented. Variables are defined in Appendix A. Industry fixed effects are based on 1-digit SIC codes. Heteroskedasticity-consistent standard
errors, clustered by deal, are shown in parentheses. Significance levels: ∗ 0.1, ∗ ∗ 0.05, ∗ ∗ ∗ 0.01.

Random Industry-size Industry-size-B/M

(1) (2) (3) (4) (5) (6)

ln(1+|  Trust |) −0.1701 ∗∗∗

−0.1943 ∗∗∗
−0.1457 ∗∗∗
−0.1679 ∗∗∗
−0.1339 ∗∗∗
−0.1671∗∗∗
(0.0339) (0.0423) (0.0392) (0.0473) (0.0394) (0.0478)
ln(Distance) −0.0067∗∗∗ −0.0106∗∗∗ −0.0080∗∗∗ −0.0098∗∗∗ −0.0078∗∗∗ −0.0094∗∗∗
(0.0004) (0.0004) (0.0003) (0.0004) (0.0003) (0.0004)
Horizontal 0.0620∗∗∗ 0.0762∗∗∗ −0.0020∗∗∗ −0.0269 −0.0025∗∗∗ −0.0053
(0.0014) (0.0010) (0.0006) (0.0360) (0.0006) (0.0276)
ln(Acq. mcap) (t − 1) 0.0090∗∗∗ 0.0127∗∗∗ 0.0059∗∗∗ 0.0261∗∗∗ 0.0061∗∗∗ 0.0243∗∗∗
(0.0003) (0.0005) (0.0003) (0.0011) (0.0003) (0.0010)
Acquirer return (t − 1) 0.0011 0.0004 0.0024∗∗ 0.0024 0.0031∗∗∗ 0.0044∗∗
(0.0012) (0.0017) (0.0011) (0.0018) (0.0012) (0.0019)
Acq. rev. growth (t − 1) 0.0041∗∗∗ 0.0064∗∗∗ 0.0051∗∗∗ 0.0075∗∗∗ 0.0045∗∗∗ 0.0054∗∗∗
(0.0013) (0.0017) (0.0013) (0.0020) (0.0013) (0.0020)
Acq. RoE (t − 1) 0.0004 −0.0005 0.0011 0.0045 0.0004 0.0033
(0.0026) (0.0033) (0.0029) (0.0043) (0.0030) (0.0044)
Acq. cash (t − 1) −0.0112∗∗∗ −0.0137∗∗ −0.0180∗∗∗ −0.0249∗∗∗ −0.0181∗∗∗ −0.0212∗∗∗
(0.0043) (0.0053) (0.0044) (0.0069) (0.0044) (0.0072)
Acq. B/M (t − 1) 0.0019 0.0072∗∗∗ 0.0033 0.0072∗∗ 0.0038∗ 0.0143∗∗∗
(0.0021) (0.0027) (0.0023) (0.0035) (0.0022) (0.0052)
ln(Targ. mcap) (t − 1) −0.0012∗∗∗ −0.0010∗∗ −0.0039∗∗∗ −0.0004 −0.0035∗∗∗ −0.0004
(0.0003) (0.0004) (0.0003) (0.0011) (0.0003) (0.0010)
Target return (t − 1) −0.0033∗∗∗ −0.0036∗∗ −0.0052∗∗∗ −0.0073∗∗∗ −0.0041∗∗∗ −0.0054∗∗∗
(0.0012) (0.0015) (0.0013) (0.0019) (0.0012) (0.0019)
Target rev. growth (t − 1) −0.0027∗ −0.0024 −0.0031∗∗ −0.0039∗∗ −0.0030∗∗ −0.0037∗∗
(0.0014) (0.0017) (0.0014) (0.0017) (0.0014) (0.0018)
Target RoE (t − 1) 0.0025 0.0050∗∗ 0.0025 0.0039∗ −0.0001 −0.0008
(0.0017) (0.0021) (0.0017) (0.0023) (0.0018) (0.0026)
Target cash (t − 1) 0.0041 0.0020 −0.0024 −0.0068 −0.0031 −0.0052
(0.0035) (0.0039) (0.0036) (0.0057) (0.0036) (0.0058)
Targ. B/M (t − 1) −0.0030∗∗ −0.0024 −0.0002 0.0017 0.0044∗∗∗ 0.0212∗∗∗
(0.0015) (0.0019) (0.0017) (0.0023) (0.0016) (0.0038)
Year FE Yes No Yes No Yes No
Industry FE Yes No Yes No Yes No
Deal FE No Yes No Yes No Yes
N 54,724 54,600 54,648 54,293 54,702 54,347
Pseudo R-sqr 0.346 0.411 0.060 0.102 0.059 0.100

target. The methodology is similar to that of Bena and Li (2014).
The regression equations are of the form:
Mer ger Pairi = α0 + α1 × ln(1 + |T rusti | + β × Xi + i
where Mer ger Pairi takes value one for the actual acquirer-target
pair, and zero for the control pairs. |T rusti | is the difference in
trust index between the target and acquirer home counties. Xi is
a vector of control variables, adapted from Bena and Li (2014). We
include year fixed effects and either industry fixed effects, based
on 1-digit SIC codes of the acquirer and the target, or deal fixed ef-
fects (1753 deals). We cluster heteroscedasticity-consistent robust
standard errors by deal.
The regression results, shown in Table 3, provide support for
our first hypothesis. A larger cultural distance is associated with
a significantly lower likelihood of merger pairing across all con-
trol groups. This result is statistically significant across both model
specifications and for all three control groups. A one-standard-
deviation increase in social trust distance is associated with an 11%
lower likelihood of merger pairing.
4.3. Complexity of deal execution
Our second hypothesis indicates a negative relationship be-
tween social trust distance and deal completion rate. To test this
prediction, we use logit and linear probability (OLS) regressions of
the following form:
Completedi = α0 + α1 × ln(1 + |T rusti | + β × Xi + i
where C omplet edi takes value one if deal i is completed, and
value zero if the deal is withdrawn. Xi is a vector of control
variables following the existing M&A literature, including size
(1)
(Moeller et al., 2004), consideration, toehold dummy and toehold
size (Betton et al., 2009), dummies for hostile (Schwert, 20 0 0) and
horizontal (defined as same 2-digit SIC code) deals as well as ten-
der offers (Betton et al., 2009), geographic distance (Kedia et al.,
2008), M/B, ROE, past share return and volatility (e.g., Fu et al.,
2013). We also include year fixed effects, industry fixed effects
based on 1-digit SIC codes, and either state or county fixed ef-
fects for both the acquirer and the target company. We cluster
heteroscedasticity-consistent robust standard errors by acquirer.
The regression results, shown in Table 5, are consistent with
our hypothesis. A larger cultural distance between target and ac-
quirer is negatively associated with deal completion rate, and this
relationship is statistically significant across all specifications. The
results are similar for logit and linear probability models and in-
cluding state or county fixed effects.
Our results also suggest that the deal completion rate is higher
for smaller deals, larger acquirers, as well as for acquirers with
higher prior stock returns and lower stock volatility. Unsolicited
and challenged offers, as well as deals involving public targets, are
significantly less likely to be completed, while tender offers and
horizontal deals are more likely to be completed. These results
are largely consistent with the existing studies, for example with
Hukkanen and Keloharju (2019).
Our second hypothesis also predicts that a larger social trust
(2) distance should result in longer deal completion times. To test

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T.-C. Lin and V. Pursiainen Journal of Banking and Finance 149 (2023) 106759

Table 4
Summary statistics - Announced deals. Summary statistics for the full sample of announced
deals. Variables are defined in Appendix A.

Mean Std P10 P50 P90 N

Deal outcomes
Completed 0.943 0.231 1.000 1.000 1.000 13,811
Completion time 71.946 79.795 0.000 45.000 180.000 13,811
Acquirer CAR 0.007 0.092 −0.090 0.002 0.111 13,811
Combined CAR 0.017 0.087 −0.076 0.012 0.122 3500
BHAR −0.076 1.127 −1.235 −0.062 1.043 7268
Trust variables
|  Trust | 0.018 0.018 0.000 0.013 0.042 13,811
Target Trust 0.353 0.028 0.316 0.352 0.385 13,811
Acquirer Trust 0.354 0.029 0.317 0.354 0.388 13,811
Acquirer controls
Acquirer mcap (USDbn) 3.533 9.336 0.092 0.763 7.692 13,811
Acquirer share ret. 0.328 0.709 −0.283 0.191 0.961 13,811
Acquirer volatility 0.415 0.253 0.176 0.345 0.752 13,811
Acquirer M/B 3.646 4.951 1.002 2.366 7.197 13,811
Acquirer ROE 0.062 0.347 −0.139 0.114 0.264 13,811
Target controls
Target mcap (USDbn) 1.208 3.483 0.025 0.202 2.521 3510
Target share ret. 0.172 0.581 −0.475 0.114 0.793 3338
Target volatility 0.523 0.314 0.215 0.438 0.955 3500
Target M/B 2.920 4.456 0.719 1.864 5.712 3444
Target ROE −0.003 0.481 −0.372 0.085 0.248 3450
Deal controls
Distance (‘000 km) 1.270 1.283 0.017 0.877 3.604 13,811
Deal value (USDbn) 0.636 3.629 0.015 0.075 0.902 13,811
Relative size 0.307 0.518 0.021 0.112 0.810 13,811
Cash only 0.335 0.472 0.000 0.000 1.000 13,811
Cash and stock 0.166 0.372 0.000 0.000 1.000 13,811
Unsolicited 0.020 0.139 0.000 0.000 0.000 13,811
Challenged 0.023 0.150 0.000 0.000 0.000 13,811
Tender offer 0.039 0.194 0.000 0.000 0.000 13,811
Non-zero toehold 0.020 0.142 0.000 0.000 0.000 13,811
Toehold size 0.553 4.585 0.000 0.000 0.000 13,811
Public target 0.292 0.455 0.000 0.000 1.000 13,811
Subsidiary target 0.229 0.420 0.000 0.000 1.000 13,811
Horizontal 0.591 0.492 0.000 1.000 1.000 13,811

this prediction, we use Cox proportional hazard regressions, which
model the “hazard rate” of deal completion as a function of ex-
plaining variables. The regression model can be written as:
hi (t ) = h0,i (t ) × eα1 ×ln(1+|T rusti | )+β ×Xi )
 
hi (t )
⇐⇒ l n = α1 × l n(1 + |T rusti | ) + β × Xi
h0,i
where hi (t ) is the time t likelihood of deal completion in the next
instant. We calculate completion time as the number of calendar
days from announcement to closing and censor at 365 days. A
higher hazard rate hi (t ) in this case implies a shorter completion
time. As an alternative specification, and to allow including county
fixed effects, we also test this hypothesis using OLS regressions of
the form:
l n(Compl et ion t imei ) = α0 + α1 × ln(1 + |T rusti | + β × Xi + i
The results, shown in Table 6, provide support for our hypoth-
esis. In the Cox proportional hazard models (columns 1 and 2),
a larger cultural distance is associated with a significantly lower
hazard, implying longer completion time. Similarly, the OLS results
suggest that a larger cultural distance is associated with signifi-
cantly longer completion times. We also find that deal completion
times are significantly longer for larger deals, both in absolute and
relative terms, as well as for unsolicited and horizontal deals. Pub-
lic targets and tender offers are also associated with longer com-
pletion times. Larger and more profitable (as measured by ROE)
acquirers are associated with shorter deal completion times. Deals
with cash consideration are also completed faster than those with
stock or mixed consideration.
4.4. M&A performance
Our third hypothesis explores the relationship between cultural
(3) distance and deal performance, as measured by acquirer announce-
ment returns, combined announcement returns, and buy-and-hold
abnormal returns. To test this hypothesis, we use OLS regression
models of the same form as Eq. (4), with the LHS variable being
the performance metric in question:
CAR(BHAR )i = α0 + α1 × ln(1 + |T rusti | + β × Xi + i (5)
We estimate cumulative abnormal returns (CAR) over a 7-day
window around the announcement date [−3, +3]. The results are
qualitatively similar using other event windows. We calculate both
acquirer CAR, as well as for a subsample of public targets, also
(4) combined CAR, calculated as the market-cap-weighted average of
acquirer and target CAR. To calculate the abnormal returns, we use
a market model with betas estimated based on daily observations
in [−252, −42] trading days vs. announcement date.
To estimate the impact on medium-term stock returns, we cal-
culate three-year buy-and-hold abnormal return (BHAR) as stock
return over a matched control firm. We use a methodology similar
to Lyon et al. (1999); Chen et al. (2007), and Li et al. (2018). We
use a three-year holding period in order to capture a long-enough
period for a majority of the deal synergies to be realized, with-
out losing too many data points due to longer period requirements.
Control firms are matched based on size, B/M, and prior year stock
return. The universe of control firms is all firms listed on the NYSE,

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T.-C. Lin and V. Pursiainen Journal of Banking and Finance 149 (2023) 106759

Table 5
Deal completion rate. The dependent variable, Completed, is a dummy taking the value 1 if
the deal is completed, 0 if it is withdrawn. Average marginal effects from logit regressions are
presented. Variables are defined in Appendix A. Industry fixed effects are based on 1-digit SIC
codes. State fixed effects (County fixed effects) include a dummy for each acquirer and target state
(county). Heteroskedasticity-consistent standard errors, clustered by acquirer, are shown in paren-
theses. Significance levels: ∗ 0.1, ∗ ∗ 0.05, ∗ ∗ ∗ 0.01.

Logit OLS

(1) (2) (3) (4) (5)

ln(1+|  Trust |) −0.3473∗∗∗ −0.3249∗∗∗ −0.3746∗∗∗ −0.3316∗∗∗ −0.3001∗

(0.1005) (0.1098) (0.1181) (0.1243) (0.1563)
ln(Distance) −0.0015∗ −0.0017∗ −0.0017∗ −0.0019∗∗ −0.0020∗
(0.0009) (0.0009) (0.0009) (0.0010) (0.0010)
ln(Deal value) −0.0093∗∗∗ −0.0098∗∗∗ 0.0012 0.0009 −0.0003
(0.0026) (0.0026) (0.0027) (0.0027) (0.0029)
ln(Acquirer mcap) 0.0132∗∗∗ 0.0137∗∗∗ 0.0035 0.0038 0.0044
(0.0026) (0.0026) (0.0025) (0.0025) (0.0028)
Acquirer share ret. 0.0094∗∗∗ 0.0093∗∗∗ 0.0112∗∗∗ 0.0113∗∗∗ 0.0121∗∗∗
(0.0030) (0.0031) (0.0032) (0.0032) (0.0034)
Acquirer volatility −0.0345∗∗∗ −0.0366∗∗∗ −0.0513∗∗∗ −0.0527∗∗∗ −0.0526∗∗∗
(0.0094) (0.0094) (0.0141) (0.0143) (0.0153)
Acquirer M/B −0.0004 −0.0004 −0.0004 −0.0004 −0.0005
(0.0004) (0.0004) (0.0005) (0.0005) (0.0005)
Acquirer ROE 0.0037 0.0039 0.0088 0.0094 0.0090
(0.0044) (0.0044) (0.0070) (0.0070) (0.0073)
Relative size −0.0061 −0.0044 −0.0461∗∗∗ −0.0444∗∗∗ −0.0461∗∗∗
(0.0043) (0.0042) (0.0089) (0.0088) (0.0094)
Cash only 0.0065 0.0074 0.0032 0.0030 0.0036
(0.0047) (0.0048) (0.0040) (0.0040) (0.0043)
Cash and stock 0.0044 0.0058 0.0064 0.0070 0.0087
(0.0047) (0.0048) (0.0056) (0.0056) (0.0060)
Unsolicited −0.1154∗∗∗ −0.1159∗∗∗ −0.4635∗∗∗ −0.4630∗∗∗ −0.4601∗∗∗
(0.0079) (0.0082) (0.0314) (0.0315) (0.0328)
Challenged −0.0854∗∗∗ −0.0863∗∗∗ −0.2939∗∗∗ −0.2923∗∗∗ −0.2803∗∗∗
(0.0078) (0.0076) (0.0295) (0.0293) (0.0301)
Tender offer 0.0608∗∗∗ 0.0574∗∗∗ 0.1024∗∗∗ 0.1015∗∗∗ 0.0967∗∗∗
(0.0113) (0.0111) (0.0134) (0.0134) (0.0138)
Non-zero toehold −0.0607∗∗∗ −0.0570∗∗∗ −0.1528∗∗∗ −0.1504∗∗∗ −0.1332∗∗∗
(0.0167) (0.0179) (0.0460) (0.0460) (0.0477)
Toehold size 0.0019∗∗∗ 0.0019∗∗∗ 0.0038∗∗∗ 0.0038∗∗∗ 0.0034∗∗∗
(0.0007) (0.0007) (0.0011) (0.0011) (0.0012)
Public target −0.0524∗∗∗ −0.0529∗∗∗ −0.0649∗∗∗ −0.0651∗∗∗ −0.0650∗∗∗
(0.0052) (0.0052) (0.0064) (0.0064) (0.0070)
Subsidiary target −0.0065 −0.0053 −0.0027 −0.0013 0.0003
(0.0057) (0.0056) (0.0039) (0.0038) (0.0042)
Horizontal 0.0094∗∗ 0.0079∗∗ 0.0123∗∗∗ 0.0114∗∗∗ 0.0126∗∗∗
(0.0039) (0.0039) (0.0040) (0.0041) (0.0044)
Year FE Yes Yes Yes Yes Yes
Industry FE Yes Yes Yes Yes Yes
State FE No Yes No Yes No
County FE No No No No Yes
N 13,776 13,653 13,811 13,811 13,154
R-sqr 0.232 0.240 0.311
Pseudo R-sqr 0.285 0.306

AMEX and NASDAQ. Matching takes place in the month prior to
acquisition closing month. We first calculate size deciles based on
all stocks listed on the NYSE and allocate all firms into these size
deciles. We then divide the bottom decile into five size portfolios
based on all firms regardless of stock exchange. We simultaneously
construct 10 B/M portfolios based on all stocks in the three ex-
changes. The chosen control firm is the one in the same size and
B/M portfolios with stock return closest to the acquirer in the prior
year.15
The results for acquirer CAR, combined CAR, and BHAR, are
shown in Table 7. Across all three metrics, they indicate a positive
relationship between cultural trust distance and M&A performance.
These results are statistically significant for all three, although
weaker for combined CAR than for acquirer CAR and BHAR. This
15
We interpret the BHAR results with a caveat that there could be confounding
factors that affect long-term returns after M&A deals.
may, in part, be due to the smaller sample size of deals with pub-
lic targets. These findings contrast the results of Ahern et al. (2015),
who find that larger national cultural differences are associated
with lower combined CAR. Our results are consistent with the no-
tion that the synergies need to be high enough to motivate pursu-
ing deals in cases where the differences in cultural trust are likely
to make the deals more complex and possibly require more effort
from the management.
4.5. Robustness checks and additional analysis
4.5.1. Controlling for corporate culture
One possible concern is that differences in corporate culture
might be correlated with regional social trust and hence affect our
results. To make sure that our results are not driven by it, we per-
form a robustness check analysis on the likelihood of merger pair-
ing, where we control for corporate culture. We use the machine

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T.-C. Lin and V. Pursiainen Journal of Banking and Finance 149 (2023) 106759

Table 6
Deal completion time. Completion time is the number of calendar days from announcement to
closing. For the Cox proportional hazard models we censor it at 365 days. Negative coefficient
values indicate lower hazard and thereby longer duration. Heteroskedasticity-consistent standard
errors, clustered by acquirer, are shown in parentheses. Significance levels: ∗ 0.1, ∗ ∗ 0.05, ∗ ∗ ∗ 0.01.

Cox prop. hazard ln(Completion time) (OLS)

(1) (2) (3) (4) (5)

ln(1+|  Trust |) −1.7893∗∗ −1.4569∗ 1.4145∗∗∗ 1.4274∗∗∗ 1.8431∗∗∗

(0.7721) (0.8163) (0.5171) (0.5473) (0.7031)
ln(Distance) 0.0235∗∗∗ 0.0245∗∗∗ −0.0175∗∗∗ −0.0189∗∗∗ −0.0183∗∗∗
(0.0063) (0.0065) (0.0044) (0.0045) (0.0052)
ln(Deal value) −0.1327∗∗∗ −0.1480∗∗∗ 0.1198∗∗∗ 0.1259∗∗∗ 0.1460∗∗∗
(0.0165) (0.0160) (0.0116) (0.0113) (0.0122)
ln(Acquirer mcap) 0.0769∗∗∗ 0.0814∗∗∗ −0.0606∗∗∗ −0.0584∗∗∗ −0.0606∗∗∗
(0.0153) (0.0151) (0.0111) (0.0110) (0.0123)
Acquirer share ret. 0.0111 0.0089 −0.0051 −0.0044 −0.0048
(0.0210) (0.0209) (0.0142) (0.0140) (0.0154)
Acquirer volatility −0.0731 −0.1728∗∗ −0.0067 0.0484 0.1069∗
(0.0788) (0.0794) (0.0560) (0.0570) (0.0627)
Acquirer M/B 0.0041 0.0044 −0.0027 −0.0026 −0.0028
(0.0029) (0.0029) (0.0021) (0.0021) (0.0023)
Acquirer ROE 0.1177∗∗∗ 0.1349∗∗∗ −0.0702∗∗ −0.0814∗∗∗ −0.0956∗∗∗
(0.0412) (0.0423) (0.0304) (0.0305) (0.0328)
Relative size −0.1722∗∗∗ −0.1567∗∗∗ 0.1217∗∗∗ 0.1126∗∗∗ 0.1054∗∗∗
(0.0368) (0.0371) (0.0253) (0.0249) (0.0270)
Cash only 0.2550∗∗∗ 0.2534∗∗∗ −0.1670∗∗∗ −0.1636∗∗∗ −0.1541∗∗∗
(0.0315) (0.0310) (0.0215) (0.0213) (0.0232)
Cash and stock −0.0311 −0.0388 0.0377∗ 0.0358 0.0457∗
(0.0321) (0.0326) (0.0225) (0.0225) (0.0248)
Unsolicited −0.9472∗∗∗ −0.9674∗∗∗ 0.5449∗∗∗ 0.5262∗∗∗ 0.4748∗∗∗
(0.1337) (0.1459) (0.0753) (0.0800) (0.0874)
Challenged −0.1276 −0.1252 0.0031 0.0138 0.0048
(0.0948) (0.0964) (0.0611) (0.0612) (0.0669)
Tender offer 0.5066∗∗∗ 0.5154∗∗∗ −0.3363∗∗∗ −0.3370∗∗∗ −0.3272∗∗∗
(0.0530) (0.0520) (0.0319) (0.0322) (0.0354)
Non-zero toehold −0.3670 −0.3371 0.0743 0.0665 0.0841
(0.2262) (0.2312) (0.1196) (0.1201) (0.1267)
Toehold size −0.0038 −0.0052 0.0030 0.0029 0.0011
(0.0061) (0.0062) (0.0035) (0.0035) (0.0037)
Public target −0.5896∗∗∗ −0.6004∗∗∗ 0.6556∗∗∗ 0.6487∗∗∗ 0.6623∗∗∗
(0.0279) (0.0276) (0.0208) (0.0208) (0.0230)
Subsidiary target −0.0658∗ −0.0583 0.0571∗∗ 0.0529∗∗ 0.0667∗∗
(0.0371) (0.0363) (0.0257) (0.0255) (0.0278)
Horizontal −0.1652∗∗∗ −0.1539∗∗∗ 0.1331∗∗∗ 0.1245∗∗∗ 0.0939∗∗∗
(0.0273) (0.0267) (0.0192) (0.0191) (0.0210)
Year FE Yes Yes Yes Yes Yes
Industry FE Yes Yes Yes Yes Yes
State FE No Yes No Yes No
County FE No No No No Yes
N 10,112 10,112 10,111 10,110 9439
R-sqr 0.362 0.376 0.438
Pseudo R-sqr 0.023 0.025

Table 7
Acquirer CAR, Combined CAR, and BHAR . CAR is calculated as the cumulative abnormal return
in the period of [−3, +3] trading days around the announcement date. BHAR is three-year buy-
and-hold return over a matched control firm. Variables are defined in Appendix A. Industry fixed
effects are based on 1-digit SIC codes. State fixed effects (County fixed effects) include a dummy for
each acquirer and target state (county). Heteroskedasticity-consistent standard errors, clustered by
acquirer, are shown in parentheses. Significance levels: ∗ 0.1, ∗ ∗ 0.05, ∗ ∗ ∗ 0.01.

Acquirer CAR Combined CAR BHAR

(1) (2) (3) (4) (5) (6)

ln(1+|  Trust |) 0.1026∗∗ 0.1686∗∗∗ 0.1622 0.2642∗ 2.7407∗∗∗ 2.7146∗∗

(0.0502) (0.0640) (0.0993) (0.1363) (0.8729) (1.1639)
Deal controls Yes Yes Yes Yes Yes Yes
Acquirer controls Yes Yes Yes Yes Yes Yes
Target controls No No Yes Yes No No
Year FE Yes Yes Yes Yes Yes Yes
Industry FE Yes Yes Yes Yes Yes Yes
State FE Yes No Yes No Yes No
County FE No Yes No Yes No Yes
N 13,811 13,154 3282 2898 7266 6672
R-sqr 0.069 0.133 0.151 0.260 0.033 0.143

10
T.-C. Lin and V. Pursiainen Journal of Banking and Finance 149 (2023) 106759

Table 8
Likelihood of merger pairing – controlling for corporate culture. The dependent variable, Merger pair, is a dummy
taking the value 1 for the actual target-acquirer combination, and 0 for the matched control group.  Integrity,
 Teamwork,  Innovation,  Respect, and  Quality are machine learning-based measures of corporate cul-
tural values estimated by Li et al. (2021). Corporate cultural distance is the Euclidean distance calculated based
on these five variables, similar to the measure used by Li et al. (2021). Average marginal effects are shown
for the logit models. The control variables included are the same as in Table 3 and defined in Appendix A.
Heteroskedasticity-consistent standard errors, clustered by deal, are shown in parentheses. Significance levels: ∗
0.1, ∗ ∗ 0.05, ∗ ∗ ∗ 0.01. .

(1) (2) (3) (4) (5) (6)

ln(1+|  Trust |) −0.2131∗∗ −0.1953∗ −0.1936∗ −0.1915∗ −0.2137∗ −0.2008∗

(0.1060) (0.1087) (0.1083) (0.1107) (0.1099) (0.1097)
Corp. cultural distance −0.0127∗∗∗
(0.0026)
 Integrity −0.0116
(0.0071)
 Teamwork −0.0080
(0.0049)
 Innovation −0.0123∗∗∗
(0.0030)
 Respect −0.0061∗
(0.0032)
 Quality −0.0104∗∗∗
(0.0039)
Deal controls Yes Yes Yes Yes Yes Yes
Acquirer controls Yes Yes Yes Yes Yes Yes
Target controls Yes Yes Yes Yes Yes Yes
Deal FE Yes Yes Yes Yes Yes Yes
N 6468 6468 6468 6468 6468 6468
Pseudo R-sqr 0.435 0.419 0.420 0.428 0.420 0.424

Table 9
Likelihood of merger pairing – additional county controls . The dependent variable, Merger pair, is a dummy taking
the value 1 for the actual target-acquirer combination, and 0 for the matched control group. The control groups are
the same as in Table 2. Average marginal effects from logit regressions are presented.  Urbanness is the difference
in the degree of urbanness based on a six-point scale by the NCHS Urban-Rural Classification Scheme.  Population
is the difference in county population.  % White is the difference in the percentage of white population, meant to
capture differences in racial diversity.  Republican vote is the difference in the share of votes for the Republican
candidate in the most recent presidential election, meant to capture political differences. The control groups are
the same as in Table 2. Variables are defined in Appendix A. Industry fixed effects are based on 1-digit SIC codes.
Heteroskedasticity-consistent standard errors, clustered by deal, are shown in parentheses. Significance levels: ∗ 0.1,
∗∗
0.05, ∗ ∗ ∗ 0.01.

Random Industry-size Industry-size-B/M

(1) (2) (3) (4) (5) (6)

ln(1+|  Trust |) −0.1692 ∗∗∗

−0.1743 ∗∗∗
−0.1696 ∗∗∗
−0.1866 ∗∗∗
−0.1635 ∗∗∗
−0.1931∗∗∗
(0.0362) (0.0451) (0.0426) (0.0503) (0.0423) (0.0506)
|  Urbanness | −0.0022∗∗∗ −0.0023∗∗∗ −0.0024∗∗∗ −0.0028∗∗∗ −0.0024∗∗∗ −0.0029∗∗∗
(0.0006) (0.0007) (0.0007) (0.0008) (0.0007) (0.0008)
ln(|  Population |) 0.0009∗∗∗ 0.0002 0.0014∗∗∗ 0.0014∗∗∗ 0.0015∗∗∗ 0.0015∗∗∗
(0.0003) (0.0003) (0.0003) (0.0003) (0.0003) (0.0003)
|  % White | −0.0005 −0.0003 0.0014 0.0022 0.0028 0.0036
(0.0040) (0.0046) (0.0044) (0.0051) (0.0043) (0.0050)
|  Republican vote | −0.0001∗ −0.0001 −0.0001∗ −0.0002∗ −0.0001∗ −0.0002∗
(0.0001) (0.0001) (0.0001) (0.0001) (0.0001) (0.0001)
Deal controls Yes Yes Yes Yes Yes Yes
Acquirer controls Yes Yes Yes Yes Yes Yes
Target controls Yes Yes Yes Yes Yes Yes
Year FE Yes No Yes No Yes No
Industry FE Yes No Yes No Yes No
Deal FE No Yes No Yes No Yes
N 54,730 54,606 54,660 54,305 54,714 54,359
Pseudo R-sqr 0.347 0.412 0.063 0.105 0.062 0.103

learning-based measures of corporate cultural values constructed
by Li et al. (2021), using earnings conference call transcripts.
The challenge in this analysis is that the measures are only
available for a small subset of the firms included in our M&A sam-
ple, and only from 2001 onwards. We construct a separate sam-
ple for the deals where these measures are available for both the
target and the acquirer and match a new control sample for each
acquirer and target, using the same methodology as for the Ran-
dom peer group in our main analysis. Here, we can only include
the Compustat firm-year observations where the corporate culture
measures are available as the universe of potential peers. Hence,
this also limits the number of control firms available. These limita-
tions result in a substantially smaller sample than that used in our
main analysis.
The results, shown in Table 8, are consistent with our main
findings. Even when controlling for corporate culture, social trust
distance is negatively associated with the likelihood of merger
pairing. Consistent with the results of Li et al. (2021), we also find

11
T.-C. Lin and V. Pursiainen Journal of Banking and Finance 149 (2023) 106759

Table 10
Likelihood of merger pairing – directional trust difference. The dependent variable, Merger pair, is a dummy taking the value
1 for the actual target-acquirer combination, and 0 for the matched control group. The control groups are the same as in
Table 2. Average marginal effects from logit regressions are presented. Variables are defined in Appendix A. Industry fixed ef-
fects are based on 1-digit SIC codes. Heteroskedasticity-consistent standard errors, clustered by deal, are shown in parentheses.
Significance levels: ∗ 0.1, ∗ ∗ 0.05, ∗ ∗ ∗ 0.01.

Random Industry-size Industry-size-B/M

(1) (2) (3) (4) (5) (6)

ln(1+|  Trust |) x Targ. higher −0.1920∗∗∗ −0.2429∗∗∗ −0.1727∗∗∗ −0.1932∗∗∗ −0.1408∗∗∗ −0.1654∗∗∗
(0.0457) (0.0572) (0.0542) (0.0634) (0.0537) (0.0630)
ln(1+|  Trust |) x Acq. higher −0.1583∗∗∗ −0.1587∗∗∗ −0.1317∗∗∗ −0.1536∗∗∗ −0.1321∗∗∗ −0.1708∗∗∗
(0.0392) (0.0518) (0.0445) (0.0556) (0.0448) (0.0565)
ln(Distance) −0.0067∗∗∗ −0.0106∗∗∗ −0.0080∗∗∗ −0.0098∗∗∗ −0.0078∗∗∗ −0.0094∗∗∗
(0.0004) (0.0004) (0.0003) (0.0004) (0.0003) (0.0004)
Horizontal 0.0620∗∗∗ 0.0762∗∗∗ −0.0019∗∗∗ −0.0270 −0.0025∗∗∗ −0.0053
(0.0014) (0.0010) (0.0006) (0.0360) (0.0006) (0.0276)
ln(Acq. mcap) (t − 1) 0.0090∗∗∗ 0.0127∗∗∗ 0.0058∗∗∗ 0.0261∗∗∗ 0.0061∗∗∗ 0.0243∗∗∗
(0.0003) (0.0005) (0.0003) (0.0011) (0.0003) (0.0010)
Acquirer return (t − 1) 0.0011 0.0004 0.0024∗∗ 0.0024 0.0031∗∗∗ 0.0044∗∗
(0.0012) (0.0017) (0.0011) (0.0018) (0.0012) (0.0019)
Acq. rev. growth (t − 1) 0.0041∗∗∗ 0.0064∗∗∗ 0.0051∗∗∗ 0.0075∗∗∗ 0.0045∗∗∗ 0.0054∗∗∗
(0.0013) (0.0017) (0.0013) (0.0020) (0.0013) (0.0020)
Acq. RoE (t − 1) 0.0004 −0.0005 0.0011 0.0045 0.0004 0.0033
(0.0026) (0.0032) (0.0029) (0.0043) (0.0030) (0.0044)
Acq. cash (t − 1) −0.0113∗∗∗ −0.0137∗∗∗ −0.0181∗∗∗ −0.0251∗∗∗ −0.0182∗∗∗ −0.0212∗∗∗
(0.0043) (0.0053) (0.0044) (0.0069) (0.0044) (0.0072)
Acq. B/M (t − 1) 0.0018 0.0071∗∗∗ 0.0032 0.0072∗∗ 0.0037∗ 0.0143∗∗∗
(0.0021) (0.0027) (0.0023) (0.0036) (0.0022) (0.0052)
ln(Targ. mcap) (t − 1) −0.0012∗∗∗ −0.0009∗∗ −0.0039∗∗∗ −0.0005 −0.0035∗∗∗ −0.0004
(0.0003) (0.0004) (0.0003) (0.0011) (0.0003) (0.0010)
Target return (t − 1) −0.0033∗∗∗ −0.0037∗∗ −0.0053∗∗∗ −0.0073∗∗∗ −0.0041∗∗∗ −0.0054∗∗∗
(0.0012) (0.0015) (0.0013) (0.0019) (0.0012) (0.0019)
Target rev. growth (t − 1) −0.0028∗ −0.0023 −0.0031∗∗ −0.0039∗∗ −0.0030∗∗ −0.0037∗∗
(0.0014) (0.0017) (0.0014) (0.0017) (0.0014) (0.0018)
Target RoE (t − 1) 0.0026 0.0050∗∗ 0.0025 0.0039∗ −0.0001 −0.0007
(0.0017) (0.0021) (0.0017) (0.0023) (0.0018) (0.0026)
Target cash (t − 1) 0.0042 0.0021 −0.0023 −0.0067 −0.0030 −0.0052
(0.0035) (0.0039) (0.0036) (0.0057) (0.0036) (0.0058)
Targ. B/M (t − 1) −0.0030∗∗ −0.0024 −0.0002 0.0016 0.0044∗∗∗ 0.0209∗∗∗
(0.0015) (0.0019) (0.0017) (0.0023) (0.0016) (0.0038)
Year FE Yes No Yes No Yes No
Industry FE Yes No Yes No Yes No
Deal FE No Yes No Yes No Yes
N 54,730 54,606 54,660 54,305 54,714 54,359
Pseudo R-sqr 0.346 0.411 0.060 0.103 0.059 0.100

that differences in corporate culture are associated with a lower
likelihood of merger pairing.
4.5.2. Controlling for county differences
Another potential concern is that our measure of social trust
captures some other county characteristics that affect M%A deci-
sions by firms. To make sure that our results are not driven by such
other county characteristics, in this section, we perform a robust-
ness check analysis controlling for differences in urbanness (based
on the six-point 2013 NCHS Urban-Rural Classification Scheme for
Counties), population, racial composition, and political leaning be-
tween the target and the acquirer counties.
The results are shown in Table 9. Controlling for these differ-
ences in other county characteristics has virtually no impact on
the estimated effect of social trust distance. The estimated coef-
ficients are very close to those in Table 3. This result suggests that
our results are not substantially affected by other county-level dif-
ferences, such as the degree of urbanness.
This result is not entirely surprising, as our measure is
constructed using social capital proxies similar to the com-
ponents of the PCA-based social capital index used in, e.g.,
Hoi et al. (2019). That index is meant as a proxy for the joint influ-
ences of social networks and cooperative norms in U.S. counties.
Hoi et al. (2019) find that social capital is negatively associated
with total and equity-based CEO compensation and argue that so-
cial capital effectively mitigates agency problems. Their result indi-
cates that social capital at least partly captures agency problems
that are unlikely to be strongly associated with political prefer-
ences, urban vs. rural areas, or racial diversity. Moreover, we find
qualitatively similar results when we use the distance in this social
capital index as the alternative independent variable. The results
are reported in Internet Appendix Section B.2 and Table IA.4.
4.5.3. Direction of trust difference
Across all our analyses, we study the effect of distance in social
trust on M&A decisions and outcomes. In this section, we perform
an additional analysis to study whether the direction of the differ-
ence in social trust also matters for merger decisions. We perform
the same analysis as in Table 3 but divide the trust difference vari-
able into cases where the target is located in a higher-trust county
and those where it is in a lower-trust one.
The results are shown in Table 10. The estimated coefficients
are very similar for both trust distance variables, suggesting that
the direction of social trust difference does not matter much for
the likelihood of merger pairing. In other words, cultural differ-
ences make mergers less likely, regardless of whether the acquirer
comes from a high-trust county and the target from a low-trust
one or vice versa.

12
T.-C. Lin and V. Pursiainen
5. Conclusion
This paper provides novel evidence on the role of cultural trust
in mergers and acquisitions. Our results suggest that differences in
social trust within the U.S. have significant implications for mergers
and acquisitions.
Our finding that M&A deals with two firms having a large social
trust distance are significantly less likely to be pursued is intuitive.
Social trust distance is likely to make both negotiating as well as
executing a merger more complicated and more time-consuming.
It seems plausible that managers prefer to avoid such combina-
tions. It is also possible that in cases where large-trust-distance
combinations are pursued, they may be less likely to reach an
agreement on a merger or an acquisition. Such attempted negotia-
tions would not appear in our data, as we only observe announced
deals. Our findings on deal completion rates and completion times
are consistent with the prediction that social trust distance is as-
sociated with more complex deal execution.
On the other hand, our finding that a larger social trust dis-
tance in domestic mergers and acquisitions is associated with
higher synergy gains is novel and opposite to the results of
Ahern et al. (2015), who find that cultural distance decreases com-
bined announcement returns in the context of cross-border M&A.
Understanding the reason for this difference between the impact
of cultural differences domestically and internationally remains a
potential avenue for future research. It could, for example, be the
case that managers are more prone to underestimating the com-
plexities of international mergers than they are in the case of do-
mestic mergers.
CRediT authorship contribution statement
Tse-Chun Lin: Conceptualization, Data curation, Formal anal-
ysis, Investigation, Methodology, Visualization, Writing – original
draft. Vesa Pursiainen: Conceptualization, Data curation, Formal
analysis, Investigation, Methodology, Visualization, Writing – origi-
nal draft.
Data availability
Data will be made available on request.
Appendix A. Definitions of variables
Variable Definition
Merger likelihood analysis - matched control groups
Merger pair Dummy taking the value 1 for the actual
target-acquirer combination, and 0 for the matched
control group.
Trust County-level trust index estimated based on the
World Values Survey (WVS) trust data. We regress the
WVS regional trust by three determinants of social
capital and use the expected county-level values from
the regression as a proxy for regional cultural trust.
Distance The distance in km between target and acquirer
headquarter cities.
Horizontal Dummy taking the value 1 if target and acquirer have
the same 2-digit SIC code.
Stock return Total stock return during the fiscal year prior to
announcement.
Revenue growth Revenue growth during the fiscal year prior to
announcement.
RoE Accounting return on equity during the fiscal year
prior to announcement.
Cash holdings Cash & equivalents divided by total assets.
(continued on next page)
13
Journal of Banking and Finance 149 (2023) 106759
Variable Definition
Cross-sectional analysis - announced deals
Completed Dummy taking the value 1 if the deal is completed, 0
if it is withdrawn.
Completion time Number of calendar days from announcement to
closing.
CAR Cumulative abnormal return in the period of [−3,+3]
trading days around the announcement date. The CAR
calculation uses a market model with betas estimated
based on daily observations in [−252, −42] trading
days vs. announcement date.
BHAR Three-year buy-and-hold abnormal return, calculated
as return over a matched control firm. Control firms
are matched based on size, B/M, and prior year stock
return. The universe of control firms is all firms listed
on the NYSE, AMEX and NASDAQ. Matching takes
place in the month prior to acquisition closing
month. We first calculate size deciles based on all
stocks listed on the NYSE, and allocate all firms into
these size deciles. We then divide the bottom decile
into five size portfolios based on all firms regardless
of stock exchange. We simultaneously construct 10
B/M portfolios based on all stocks in the three
exchanges. The chosen control firm is the one in the
same size and B/M portfolios with stock return
closest to the acquirer in the prior year.
Trust County-level trust index estimated based on the
World Values Survey (WVS) trust data. We regress the
WVS regional trust by three determinants of social
capital and use the expected county-level values from
the regression as a proxy for regional cultural trust.
Distance The distance in km between target and acquirer
headquarters cities.
Share return Total share return in the 12m prior to announcement.
Volatility Annualised volatility of daily share return in days
[−252, −42] vs. announcement date.
Relative size Deal value divided by acquirer market cap.
Horizontal Dummy taking the value 1 if target and acquirer have
the same 2-digit SIC code.
Non-zero toehold Dummy taking the value 1 if acquirer has initial
shareholding in the target company.
Toehold size The percentage of target shares held by the acquirer
prior to announcement.
Supplementary material
Supplementary material associated with this article can be
found, in the online version, at 10.1016/j.jbankfin.2023.106759.
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