Cultural similarity as in-group favoritism: The impact of religious and ethnic similarities on alliance formation and announcement returns

Strategic alliance research has shown that national cultural similarity between partner firms can reduce transaction costs and positively influence cross-border alliance formation and performance. Yet, social identity research in psychology suggests that cultural similarity can give rise to in-group favoritism, which can lead partner firms sharing similar cultural backgrounds to cooperate with each other to defend their shared identity instead of pursuing economic efficiencies associated with cultural similarity. To investigate in-group favoritism associated with cultural similarity, we examine the influence of cross-regional religious similarity and ethnic similarity in the U.S. on domestic strategic alliance formation and alliance announcement returns. We find that cross-regional religious similarity and ethnic similarity in the U.S. positively affect the volume of interstate alliance activities, but are negatively associated with combined alliance announcement returns of partner firms. These findings suggest that cross-regional religious similarity and ethnic similarity facilitate interstate alliance activities between U.S. states, but investors seem to negatively interpret alliance decisions that can be potentially driven by in-group favoritism.