Acquisitions and social capital

We examine the association between the social capital—social norms that encourage altruism and discourage opportunism—in the state of the firm's headquarters and the acquisitions it makes. We find that the cumulative abnormal return around an acquisition announcement is high when an acquirer is headquartered in a high social capital state in the United States. This effect is robust and incremental to the effect of a firm's corporate social responsibility (CSR) ratings and economically comparable to the effect of corporate governance. The effect of social capital is stronger for firms that have lower CSR ratings, which indicates social capital may act as a substitute for CSR. An additional analysis shows that social capital's effect is stronger in a subsample of firms with weak corporate governance. Acquirers from states with high social capital also demonstrate less hubris in acquiring targets than those from states with low social capital as the evidence of lower bid premiums indicates. Overall, our results show that the social norms that social capital measures mitigate potential agency problems in acquisitions by inducing managers to honor their obligations to shareholders.