Acquirer-Target Social Ties and Merger Outcomes

by Jim Naughton, for The Harvard Law School Forum at Harvard Law School, January 14, 2010.

In our recent working paper Acquirer-Target Social Ties and Merger Outcomes, we estimate the relationship between merger announcement returns and the extent of social ties between the top managers and directors of the two merging firms. We focus on educational institutions as well as employment history as the basis of the social networks that we use in our analyses.

Using a sample of 539 mergers between publicly-traded U.S. firms between 1999 and 2007, we find that acquirers’ announcement returns associated with a merger tend to be lower in the presence of many social connections. Upon examining the relationship between target announcement returns and social ties, we find no significant relationship that would indicate that targets are overpaid based on social networks. We then consider the acquirer and target weighted average announcement return for the combined entity and confirm that the overall effect of social ties is significantly negative, both statistically and economically. This supports the view that the negative impact of social networks outweighs whatever positive information-based effects might be present…(continue reading)

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