Sequentiality and Distance(s) in Cross-Border Mergers and Acquisitions: Evidence from Micro Data

We study how the probability of engaging in mergers and acquisitions is related to geographical and cultural distance, and to a combination of distance and experience, referred to as sequentiality (i.e., number of past mergers and acquisitions in the target country and in countries that are, either geographically or culturally, "contiguous" to the acquisition and/or the target country). We start by showing that aggregate flows of mergers and acquisitions are first directed toward culturally similar, larger, richer, more developed, and less risky countries, in spite of higher unit labor costs. Thereafter, the number of mergers and acquisitions in each country continues to be driven by cultural distance, notwithstanding high tax rates and low trade openness. Geographical distance is unimportant in both steps. We then find strong evidence of sequentiality effects related to cultural but not geographical (sharing a common border) contiguity. While the cultural effects tend to disappear at the level of second-order contiguity (being contiguous to the acquisition country's contiguous countries but not to the acquisition country), a geographical pattern seems to emerge only when second-order contiguity is addressed.