Determinants of acquirer-target distance in M & A

Abstract

Purpose – The purpose of this paper is to propose several potential determinants of the distance between acquirer and target in M & A deals and examine the negative impact of the acquirer-target distance on announcement returns of acquiring firms. Design/methodology/approach – By employing two-stage regression model, the authors control for the potential endogeneity of acquirer-target distance. The authors use excess distance instead of raw distance between acquirer and target to look at the impact of acquirer-target distance on announcement returns. Findings – The authors find that acquirer-target distance in M & A tends to be longer when major hub airports are located closer to acquiring and target firms, target firm is located in a region with higher level of unemployment rate and median household income, and target firm is smaller and has more cash holdings. When controlling for the potential determinants of acquirer-target distance, including the level of targets information asymmetry, the authors still find that the excess distance between acquirer and target has a negative impact on announcement returns of acquiring firms. Originality/value – This study provides three main contributions to the literature. First, the authors find that acquirer-target distance in M & A is not exogenous and determined by several firm characteristics and regional economic factors. Second, the authors show that the acquirer-target distance has a negative impact on announcement returns even when controlling for the potential determinants. Third, by including information asymmetry measures as potential determinants of acquirer-target distance, the authors show that information advantage of local bidders may not be the most critical factor for their higher returns compared to the bidders from remote areas.