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.

Citation

Kim, T.-N. and Chun, B. (2016), "Determinants of acquirer-target distance in M & A", Managerial Finance, Vol. 42 No. 2, pp. 95-117. https://doi.org/10.1108/MF-08-2014-0220