Firms of a Feather Merge Together: Information Flows, Familiarity Bias and M&A Outcomes

We show that cultural proximity between two firms’ boards leads to a higher likelihood of the two firms entering a merger and acquisition (M&A) deal in India. This phenomenon may indicate firms’ reliance on culture, as measured by caste, as an informal channel of information when making critical investment decisions with imperfect information. However, it may also be driven by familiarity bias leading to sub-optimal investments. Indeed, caste-proximate M&A deals are value destroying for both acquirer and target, as well as the merged entity. There is also no transfer of value from acquirers to targets, and no significant reduction in time to completion, indicating that potential trust among directors with similar caste identities does not benefit the negotiation process. Overall, our findings show that familiarity bias in favor of culturally proximate agents can lead to sub-optimal investment decisions. JEL Classifications: G11, G14, G34, Z10