Language similarity and mergers and acquisitions transactions

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Summary

With the globalisation of the capital markets, it is increasingly common for people with different native language backgrounds to interact in business activities. This paper investigates how native languages affect firm investment decisions, in particular merger and acquisition (M&A), which involves considerable uncertainty and therefore requires efficient communication.

The study reveals that language similarity between acquirers and targets leads to higher post-M&A performance. It also identifies one channel through which language similarity contributes to M&A quality: by improving communication efficiency.

The research also shows that when acquirers and targets speak the same dialects, acquirers pay less premium, pay with less equity, spend less time to complete a deal, are more likely to complete a deal, and are less likely to write down goodwill or divest acquired assets after the M&A. Language similarity between the managers of both parties contribute to M&A negotiation outcomes, and language similarity between acquirer and target’s employees contribute to post-M&A integration.

Takeaways for companies and managers

  • While people can use a common language to communicate in M&A deals, their native language backgrounds still affect communication efficiency.
  • The impact of language similarity on post-M&A performance is more pronounced when the native languages of acquirers and targets are less intelligible.

Implications for research

  • The study adds to the M&A literature by focusing on how language—an essential communication tool—affects information asymmetry, a topic previously overlooked. It provides useful evidence that similar native language backgrounds help reduce information asymmetry.
  • The study contributes to the literature on language barriers in the capital market. Different from prior studies that mainly focus on official language backgrounds, this study documents that when people share the same official language, similar native dialects between acquirers and targets still contribute to M&A quality.
  • The research adds to the growing literature on the impact of homophily in managerial decision-making. It shows that common dialect could have a positive impact on M&A outcomes.

Want to know more?

Pan, X., & Zhang, J. (2022). Language Similarity and M&A Transactions. European Accounting Review, 33(3), 741–770.