Social Capital, Opportunism, and Corporate Acquisition

Abstract

We examine how local social capital---characterized by social norms, trust, and networks at the U.S. county level---influences mergers and acquisitions activities. Firms located in high-social-capital counties exhibit lower acquisition intensity at the extensive, but not the intensive, margin, implying selective engagement in acquisitions. Moreover, social capital reduces (i) the likelihood of acquisitions within the same region or industry, (ii) the likelihood of proposed acquisitions undergoing antitrust scrutiny, and (iii) the likelihood of acquirers paying for deals with overvalued stocks. This constraining effect is further evidenced by extensive due diligence, a preference for targets from high-social-capital regions, and the avoidance of sin-industry targets. Social capital contributes to positive cumulative abnormal returns on average, but only weakly at the upper end of the return distribution, suggesting suboptimal performance due to discerning target choices. Our findings suggest that social capital encourages selective and prudent acquisition decisions, thereby mitigating opportunistic practices.

Keywords: Social Capital, M&A, Corporate Opportunism, Stakeholder Theory