Neighborhood Social Capital and Firm Decision-Making: Evidence from Mergers and Acquisitions
54 Pages Posted: 16 Feb 2022 Last revised: 12 Dec 2022
Date Written: February 3, 2020
We examine whether and how the social capital surrounding firms’ headquarters affects firm decision-making regarding mergers and acquisitions (M&As). We document that M&A deals made by firms located in counties with higher levels of social capital are associated with superior acquirer announcement returns. We further show that such improvements originate from social capital’s monitoring role, which prevents self-serving deals but not managerial incompetence or overconfidence. In addition, we find that the positive effect of social capital on firm decision-making quality lasts over the long term. Our results are robust to various endogeneity and robustness checks including instrumental variable estimations, high-dimensional fixed effects, extra controls, and alternative measures of social capital.
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