Proximity to urban centers in mergers and acquisitions

Abstract

Purpose

The purpose of this paper is to examine the impact firm proximity to financial centers has on announcement returns and time to deal completion for mergers and acquisitions.

Design/methodology/approach

Using a data set of merger and acquisition activity from 1986 to 2014, target and acquiring firms are classified as rural or urban based on their geographic proximity to major financial centers. The impact of this proximity on short-term acquisition announcement returns and on the amount of time required to complete the transaction are tested.

Findings

Markets react more favorably to the acquisition of firms headquartered in a rural area, likely due to increased information advantage on the part of the acquiring firm. Furthermore, the acquisition of a rural firm requires greater time to completion.

Practical implications

Acquiring firms may be able to use information asymmetry to their advantage when acquiring firms located in a more rural setting with higher levels of information asymmetry. However, this requires the acquiring firm to generate an informational advantage and will also require a greater time commitment on average to complete the deal.

Originality/value

While prior literature has demonstrated that the distance between target and acquirer can affect acquisition returns and time to deal completion, this study adds to the literature by demonstrating that the geographic location of the target firm relative to major financial hubs can have a unique effect on mergers and acquisitions as well.

Citation

Bick, P., Crook, M.D., Lynch, A.A. and Walkup, B. (2017), "Proximity to urban centers in mergers and acquisitions", Managerial Finance, Vol. 43 No. 11, pp. 1292-1308. https://doi.org/10.1108/MF-01-2017-0014