Trust and Inter-Regional M&As : Evidence from China

This paper investigates the economic impact of trust on inter-region mergers and acquisitions (M&As) using a large sample of M&As in China. We find that trust distance among regions negatively predicts frequency of inter-region mergers, merger volume and synergy gains. These results are robust to different measures of trust and takeover gains. Our results remain also after controlling for endogeneity using a two-step Heckman model and instrumental variables. The negative effects of trust distance on inter-region M&As activities and synergy gains are less pronounced when legal institution level distance between regions are smaller, consistent with trust being a substitute for formal institutions. This relation is less prominent when corporate governance and information disclosure level distance between regions are smaller, suggesting trust is more useful in transactions with higher information asymmetry; it is less salient when financial market development level distances between regions are smaller, consistent with trust is more important with repeated interactions between economic parties. Overall, our results highlight the role played by trust in shaping corporate decisions and economic outcomes