Do Low Search Costs Facilitate Like-buys-like Mergers? Evidence from Common Bank Networks

76 Pages Posted: 18 Feb 2021 Last revised: 3 Mar 2021

See all articles by Jiakai Chen

Jiakai Chen

University of Hawaii

Joon Ho Kim

University of Hawaii at Manoa

S. Ghon Rhee

University of Hawaii at Manoa - Shidler College of Business; University of Hawaii at Manoa - Department of Financial Economics and Institutions

Date Written: February 13, 2021

Abstract

We examine how search frictions affect merger outcomes. Exploiting firm connections in common bank networks (CBNs) as a channel for reducing search costs, we show that like-buys-like mergers are more probable between firms connected through a CBN. This effect is amplified if the connection has been recently formed or the network contains many plausible choices for merger partners. CBN-facilitated mergers exhibit higher synergy and lower post-merger cost of debt. We confirm that CBNs reduce search costs even after alternative explanations are considered. These findings highlight the importance of search in the process of redrawing firm boundaries.

Keywords: Search costs, Common bank network, Asset complementarity, Like-buys-like mergers, Synergy

JEL Classification: G21, G24, G34

Suggested Citation

Chen, Jiakai and Kim, Joon Ho and Rhee, S. Ghon, Do Low Search Costs Facilitate Like-buys-like Mergers? Evidence from Common Bank Networks (February 13, 2021). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3785029

Jiakai Chen (Contact Author)

University of Hawaii ( email )

Honolulu, HI 96822
United States

Joon Ho Kim

University of Hawaii at Manoa ( email )

2404 Maile Way
Honolulu, HI 96822
United States

S. Ghon Rhee

University of Hawaii at Manoa - Shidler College of Business ( email )

2404 Maile Way
C-304, FEI/CBA
Honolulu, HI 96822
United States

University of Hawaii at Manoa - Department of Financial Economics and Institutions ( email )

United States

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