Homophily and Merger Dynamics

Stefano Bonini, Meghana Vaidya

Research output: Contribution to journalArticlepeer-review

Abstract

We propose a novel multi-factor metric of homophily between the CEOs of the acquirer and target firms as a causal determinant of mergers and acquisitions (M&As). We find strong evidence that higher homophily among the two CEOs increases the likelihood of M&A deal initiation and completion. When homophily is high, deals are more likely to be paid in cash, exhibit significantly larger long-term value creation and are less subject to ex-ante overpricing as measured by ex-post goodwill write-offs. These effects stem from similarity between CEOs creating trust, reducing information asymmetry and facilitating effective communication. Our approach resolves prior conflicting results on the effect of homophily on large corporate decisions and strongly indicates the need for a multi-dimensional estimation of homophily to obtain conclusive results.

Original languageEnglish
Pages (from-to)1367-1391
Number of pages25
JournalBritish Journal of Management
Volume35
Issue number3
DOIs
StatePublished - Jul 2024

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