Friendly Social Ties Between Merging Companies Can Spell Trouble

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, according to Joy Ishii of Stanford Graduate School of Business and Yuhai Xuan of Harvard Business School. 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. 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.