Friendly Social Ties Between 2 Merging Companies Can Spell Trouble !

 Mon 11 Nov 2013 

Research Finding 

Friendly Social Ties Between  2 Merging Companies Can Spell Trouble ! 

Observed fact : 

Firms are more likely to merge if their directors or senior executives are connected socially, but these friendly ties are associated with lower value creation for shareholders after the merger .

  A 13% increase in the extent of social connections decreases the cumulative abnormal return in the three-day period around the acquisition announcement by about 1 percentage point.

Caveat : 

 Moreover, the presence of social connections between an acquirer and a target makes it more likely that the purchased company will be sold off and that the acquisition will be considered a failure, the researchers say.

Courtesy, Research :] Joy Ishii of Stanford Graduate School of Business and Yuhai Xuan of Harvard Business School.