Does Cultural Similarity Affect Managerial Learning? Evidence from Corporate Acquisitions

Abstract

This study examines whether the corporate cultural similarity between a target and an acquiring firm influences the acquiring managers’ decision to abandon a corporate acquisition attempt conditional on the acquiring firm's stock price reaction at the announcement of the deal. We find that higher cultural similarity decreases the propensity of acquiring managers to listen to the stock market. We use the inclusion in the annual list of the 100 Best Corporate Citizens as an exogenous shock to establish a causal link. We interpret the findings to imply that acquiring managers are subject to a confirmatory bias that leads them to give an overly optimistic valuation to target firms that share similar corporate culture. Therefore, cultural similarity between a target and an acquiring firm could have detrimental effects on the acquiring firm.

Keywords: Corporate Acquisition, Cultural Similarity, Managerial Learning

JEL Classification: G30, G32, G34, M14