Acquirer-Target Social Ties and Merger Outcomes

This paper investigates the effect of social ties between acquirers and targets on merger performance. Using data on educational background and past employment, we construct a measure of the extent of cross-firm social connection between directors and senior executives at the acquiring and the target firms. We find that between-firm social ties have a significantly negative effect on the abnormal returns to the acquirer and to the combined entity upon merger announcement. Moreover, acquirer-target social ties significantly increase the likelihood that the target firm’s CEO and a larger fraction of the target firm’s pre-acquisition board of directors remain on the board of the combined firm after the merger. This also holds true at the level of individual target directors. An individual target director is more likely to be retained on the post-merger board if that target director has more social connections to the acquirer’s directors and senior executives. In addition, we find that acquirer CEOs are more likely to receive bonuses and are more richly compensated for completing mergers with targets that are highly connected to the acquiring firms, that acquisitions are more likely to occur between two firms that are wellconnected to each other through social ties, and that such acquisitions are more likely to subsequently be divested for performance-related reasons. Taken together, our results suggest that social ties between the acquirer and the target lead to poorer decision-making and lower value creation for shareholders overall.

Yuhai Xuan is an Assistant Professor in the Finance Unit of the Harvard Business School. Professor Xuan holds an A.M. and a PhD in Business Economics from Harvard University. His research interests are in the areas of empirical corporate finance, corporate governance, and behavioral finance.