Firms of a feather merge together: cultural proximity and M&A outcomes

Abstract

Using data from India, we show that shared caste identities between two firms’ directors increases the likelihood that they enter a merger and acquisition (M&A) deal. This may indicate directors’ reliance on caste as an informal information channel. But it may also be driven by their agency or overestimation of synergies, leading to sub-optimal deals. Indeed, we find that caste-proximate M&A deals create less value than caste-distant deals for both acquirer and target. The negotiation process and long run performance also do not improve. Evidence strongly supports presence of agency costs but not information gains or overestimation of synergies