The Power of Local Communities: The Role of Neighborhood Social Capital in Corporate Acquisitions

Abstract

This paper examines the impact of neighborhood social capital on firm acquisition strategies. We find that firms headquartered in counties with higher social capital are more prudent in undertaking acquisitions and their deals achieve better deal announcement returns. Social capital can effectively mitigate free cash flow agency problems in M&As and prevent deals characterized by managerial empire-building. The positive effect of social capital also lasts in the long run. Collectively, our empirical evidence highlights the important role of neighborhood social capital in mitigating managerial self-serving motives within the corporate strategic decision-making process.