Effects of Cultural Difference on Cross-Country Mergers and Acquisitions

In this paper, we examine whether the performance of U.S. companies engaging in cross-border mergers and acquisitions (M&A) is influenced by the culture of the host countries in which the target firms are located. We observe that acquiring firms that enter culturally distant markets tend to have lower leverage and prefer smaller deals in order to mitigate the cultural risk. Contrary to the claim of the traditional cultural clash hypothesis, we find that acquiring firms, on the average, earn significantly higher cumulative abnormal returns when they announce deals with target firms in countries whose cultures are distant from that of the U.S. However, the positive cultural effect is found only when we include smaller deals. Therefore, it is critical to include smaller deals to capture the cultural effect on M&A performance given that companies tend to be more cautious when entering culturally distant markets. Although the culture effect is stronger for private firms, our result is robust regardless of the methods of payment or whether target firm is private or public.