Curvilinear relationship between cultural distance and equity participation: An empirical analysis of cross-border acquisitions

We examine the relationship between national cultural distance and equity participation using an analysis of a sample of more than 100,000 cross-border acquisitions from 1976 to 2008. We find that cultural distance has a curvilinear (U shaped) relationship with equity participation: Acquiring firms make large equity acquisitions at both low and high cultural distances and small equity acquisitions at moderate cultural distances. In addition, we find that industry relatedness of acquisitions positively moderates the relationship between cultural distance and equity participation: Acquiring firms take a higher equity stake for a given cultural distance if the acquisitions are in a related industry. Our findings offer important insights into firms' market entry behavior and provide guidelines for managers about entry strategies.