The asymmetric relationship between national cultural distance and target premiums in cross-border M&A

- The relationship between national cultural distance and target premiums is asymmetric.
- U.S. bidders pay lower premiums for culturally-distant foreign targets.
- No such 'culture discount' is observed when foreign bidders evaluate U.S. targets.
- The asymmetry is associated with the bidder's familiarity with the target country culture.

Prior literature routinely assumes symmetric cultural distance (CD) in a given country pair, suggesting an identical role for the home and host countries. However, if the absolute CD is perceived differently depending on the acquirer's home base, it may yield disparate effects in cross-border M&A (CB M&A) transactions. Consistently, we find that the relationship between CD and CB M&A premiums is not uniform, but varies by acquirer origin. While we find a strong negative association between CD and premiums when U.S. firms bid for foreign targets, no such negative association is observed when foreign bidders evaluate U.S. targets. Using traveler flows, student exchanges, and previous acquisitions as proxies for directional cross-cultural familiarity, we provide evidence that familiarity with the target's national culture is related to the magnitude of CD discount in a systematic way and thus explains the observed asymmetry. Our findings highlight the existence, as well as the source, of the asymmetric property in the relationship between CD and target premiums in CB M&A.