Employee-management trust and M&A activity

- Firms with cultures of trust (“SCT firms”) announce relatively small acquisitions.
- Bidder returns are lower for large acquisitions made by SCT firms than other firms.
- The culture of SCT firms generally suffers after they make large acquisitions.

We examine the relation between the trust that employees have in management and the M&A activity of firms. We measure this trust by using rankings compiled by the Great Place to Work Institute (GPWI) from 1998 to 2011. Although the volume of M&A activity is not significantly different for firms with strong cultures of trust (“SCT firms”) versus other firms, the relative size of acquisitions announced by SCT firms is significantly smaller than the size of acquisitions announced by other firms. Furthermore, when SCT firms announce relatively large acquisitions, bidder returns and the percent change in the combined values of bidders and targets are lower than the corresponding returns for other firms. Finally, when SCT firms make large acquisitions, they are significantly more likely to suffer a loss in their GPWI ranking as compared with other SCT firms. Overall, the results are consistent with the conclusion that the M&A policies of firms are influenced by a culture of trust between employees and management.