The Asymmetric Relationship between National Cultural Distance and Target Premiums in Cross-Border M&A

68 Pages Posted: 6 Sep 2019

See all articles by Jongha Lim

Jongha Lim

California State University - Fullerton, Department of Finance

Anil K. Makhija

Ohio State University (OSU) - Department of Finance

Oded Shenkar

Ohio State University (OSU) - Human Resource Research

Date Written: July 15, 2016

Abstract

Prior literature routinely assumes symmetric cultural distance (CD) in a given country pair, suggesting an identical role for the home and host countries. However, if the absolute CD is perceived differently depending on the acquirer’s home base, it may yield differential effects in cross-border M&A (CB M&A) transactions. Consistently, we find that the relationship between CD and CB M&A premiums is not uniform, but varies by acquirer origin. While we find a strong negative association between CD and premiums when U.S. firms bid for foreign targets, no such negative association is observed when foreign bidders evaluate U.S. targets. Using traveler flows, student exchanges, and previous acquisitions as proxies for directional cross-cultural familiarity, we provide evidence that familiarity with the target’s national culture is a main driver that mitigates the negative effects of CD on premiums and thus explains the observed asymmetry. Our findings highlight the existence, as well as the source, of the asymmetric property in the relationship between CD and target premiums in CB M&A.

Keywords: Cross-Border M&A, National Cultural Distance, Target Premiums

JEL Classification: G34

Suggested Citation

Lim, Jongha and Makhija, Anil K. and Shenkar, Oded, The Asymmetric Relationship between National Cultural Distance and Target Premiums in Cross-Border M&A (July 15, 2016). Journal of Corporate Finance 41 (2016), 542-571.. Available at SSRN: https://ssrn.com/abstract=2285891 or http://dx.doi.org/10.2139/ssrn.2285891

Jongha Lim (Contact Author)

California State University - Fullerton, Department of Finance ( email )

SGMH 5170
Fullerton, CA 92831
United States
657-278-7987 (Phone)

Anil K. Makhija

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-1899 (Phone)

Oded Shenkar

Ohio State University (OSU) - Human Resource Research ( email )

700 Fisher Hall
2100 Neil Avenue
Columbus, OH 43210-1144
United States

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