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Linguistic distance and mergers and acquisitions: Evidence from China

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  • Li, Lu
  • Duan, Yang
  • He, Yuqian
  • Chan, Kam C.

Abstract

We use a new measure of linguistic distance and examine how it relates to the wealth effects of mergers and acquisitions using a sample of acquisitions in China. Linguistic distance between the acquirer and the target is constructed based on the map that defines the difference in level between any pair of languages in China. We find a significant negative relationship between the linguistic distance and the acquirer's abnormal return around the announcement. The findings are robust to different model specifications, institutional differences in local financial development, and after accounting for multicollinearity between linguistic and geographical distances and the potential social networks between acquirers and targets. The negative effect of linguistic distance is more pronounced when: (1) the deals are not in high-tech industries, (2) acquirers are not from Putonghua popular areas, and (3) acquirers are not from a linguistically diverse area. Further analysis suggests that top management's dialect experience is valuable to the acquirer's shareholders in mergers and acquisitions. Our findings suggest that cultural distance matters in corporate decisions.

Suggested Citation

  • Li, Lu & Duan, Yang & He, Yuqian & Chan, Kam C., 2018. "Linguistic distance and mergers and acquisitions: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 49(C), pages 81-102.
    • Handle: RePEc:eee:pacfin:v:49:y:2018:i:c:p:81-102
    DOI: 10.1016/j.pacfin.2018.04.002
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    More about this item

    Keywords

    Cultural distance; Linguistic distance; Mergers and acquisitions;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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