The Impact of Social Connections on Merger Performance

This thesis investigates the impact of social connections on merger performance using a sample of U.S. firms. Specifically, we classify connections into four types based on previous literature: Type 1 connections refer to firms with overlapping directors or senior managers (Cai and Sevilir, 2012); Type 2 connections refer to situations where a director or senior manager from the acquirer and another director or senior manager from the target simultaneously serve on a third firm around the announcement date of the deal (Cai and Sevilir, 2012); Type 3 connections refer to situations where a director or senior manager from the acquirer and another director or senior manager from the target share a common educational tie or a past employment tie (Ishii and Xuan, 2014); Type 4 connections refer to the existence of cross-holding institutional investors, defined such that an institutional shareholder holds both shares of the bidder and the target around the announcement of the transaction. We find that the many of the conclusions reached by prior literature with respect to the influence of each of these types of social connections on the value creation of acquiring firms are not robust. In particular, they are sensitive to changes in sample period, industries, model specification and sample selection criteria. In addition, our results suggest that, on average, cross-holding institutional shareholders have positive total returns around the merger announcement date, while they tend to realize negative returns once we constrain the sample to the deals with negative acquirer announcement returns. Our results also suggest that cross-holding shareholders have significantly higher returns from the acquirer and the target together than from the acquirer alone, and acquirers with larger percentage of cross-holding shareholders are associated with lower announcement returns. By systematically considering all possible types of connections in the merger context, we find that different types of connections are interrelated to a certain extent