| Arrow(1969)documents that trust impact an impressive array of financial outcomes in markets and underlies virtually every economic exchange.As the most essential element of social capital,trust deeply reflects the cohesion among specific groups,and is the key factor influencing a country's long-term economic prosperity after the material capital,human capital and technology(Guiso et al,2006).Although economists and sociologists have realized the importance of trust earlier,the empirical research on trust and financial market has not emerged until recent years(Ziegales,2015).During financial investment,becausefinancial activities contain the commitment to future payment,and the commitment to future payment depends on the credibility of the participants,so the effective of financial investment highly depends on trust(Guiso,2008;Feng ke et al.,2017).It has been shown trust facilitates economic growth and social efficiency(Fukuyama,1995;La Porta et al.,1997;Zak and Knack,2011),promotes bilateral trade(Guiso et al.,2009),enhance capital market participation(Guiso et al.,2004,2008),narrows firm's bank loan spreads(Hasan et al.,2017),reduces corporation's IPO underpricing(Li et al.,2017)and future crash risk(Li et al,2017),influences firms' investment and financing decisions(Bottazzi et al.,2016;Duarte et al.,2012).These studies indicate that trust establishes credibility between contracting counterparties,reduces associated cost,and thus promote corporation and participation in financial markets.The role of trust is especially relevant for mergers and acquisitions,where accurate valuations are unlikely and post-merger integration will require non-contractible effort by both firms.In this paper,we ask whether trust among regions affect inter-region M&As volumes in China and how trust is related to M&As success and synergy gains.Using regional social trust data and a large sample of inter-region M&As in China between 2009 and 2018,we investigate the economic impact of trust on inter-region M&As.We conduct three steps of empirical investigations.First,from the perspective of regional level,we investigate whether trust distance among regions reduces frequency and volumes of inter-region M&As in China.Second,from the perspective of firm level,we investigate whether trust distance among regions influencessynergy gains,and further explore the economic mechanism behind it.Third,we investigate whether the effect of trust on M&As may differ with formal institution environment,information asymmetry and repeated interactions between economic parties.This paper not only provides a new perspective to understand the relationship between social trust and China's strong economic growth and rapid development of capital market,but also provides theoretical and empirical support for China to strengthen the construction of social trust,improve the soft environment of investment,and promote long-term economic growth and prosperity of capital market.The main conclusions of this paper can be summarized as follows:First,from the perspective of regional level,we find that on average trust distance among regions reduces frequency and volumes of inter-region M&As in China.In particular,we find that the greater is distance between two regions,the smaller is the frequency and volumes of inter-region M&As,while controlling for other possible determinants.Our results also remain consistent after robustness tests including change of key variables,estimation method and sample adjustment.Second,from the perspective of firm level,we find greater trust distance also leads to lower synergy gains,as proxied by the announcement returns of acquirers,which are listed Chinese mainland firms.In multivariate regressions that account for other potential effects,we find that the negative impact of trust distance on merger gains is both statistically and economically significant.To ensure that the measures used are not picking up other region-level factors that may affect inter-region M&As gains,we also incorporate region-level factors and region-fixed effect that may also affect M&As returns.Our results remain robust using alternative trust measures,alternative synergy measures or samples excluding certain provinces with disproportionally large firm-year observations.Our results also remain consistent after controlling for endogeneity using a two-step Heckman model and instrumental variables.Third,the effect of trust on M&Asdiffer with formal institution environment,information asymmetry and repeated interactions between economic parties.Our result show the negative effect of trust distance on inter-region merger returns are less pronounced when the formal institution difference between regions are smaller.In other words,trust plays a less important role when the formal institution level among regions are similar.If the formal institutions distance among regions are large,acquirer and target firm will seek solutions to conflicts outside the formal system,and develop a mechanism that relies on trust to resolve disputes and punish defaulters.Thus trust has a more significant impact on inter-region merger returns.On the contrary,if acquirer and target firm are from regions with smaller social trust distance,acquirer and target firm will rely on formal institutions to resolve disputes and punish defaulters.Thus trust' impact on inter-region merger returns is not obvious.Our results show that when the degree of information asymmetry is more serious,trust can play a more important role.This paper identifies three variables related to the degree of information asymmetry:diversified M&As,the geographic distance between acquirer and target firm and the marketization level of target firm's location.Results show that(1)In diversified M&As,the degree of information asymmetry is higher,and trust has a more significant impact on inter-region merger returns.(2)When the geographic distance between acquirer and target firm is large,the degree of information asymmetry is higher,and trust has a more significant impact on inter-region merger returns.(3)When the marketization level of target firm's location is high,the degree of information asymmetry is higher,and trust has a more significant impact on inter-region merger returns.Repeated interactions between transaction parties provide opportunity for both parties to develop private trust,thus social trust's effect is moderated.This paper identifies two variables related to repeated interactions opportunities:whether the final transaction price is equal to the target enterprise's asking price and the financial industry development level of target firm's location.Results show that(1)When the final transaction price is different to the target enterprise's asking price,which means acquirer and target firm have lots of repeated interactions and negotiations.In this case,social trust doest not have a significant impact on inter-region merger returns.(2)When the financial industry development level of target firm's location is high,there are intensive economic activities and better trading facilities,which will lead to faster information transmission and higher transaction frequency,thus providing more opportunities for repeated interaction between agents.In this case,social trust doest not have a significant impact on inter-region merger returns.This study contributes to the existing literature in several ways.First,research focused on M&As in emerging countries suggested the most commonly studied antecedents of post-acquisition performance are firm-and industry-specific variables and more recently on the effects of institutional factors.As the most important component of informal institutions,trust facilitates the collection and dissemination of knowledge,which makes trust particularly important in the context of uncertain event like M&As.Building on current literature,this study provides new evidence that regional trust has incremental predictability in regard to firm's M&As decisions and synergy gains,thus extends research in M&As.Second,this study is among the few studies to investigate the role of trust in finance.Researchers have demonstrated that trust plays an important role in economic development(Fukuyama,1995),bilateral trade(Guiso et al.,2009),financial development(Guiso et al.,2004),peer-to-peer lending(Duarte et al.,2012),venture-capital activity(Bottazzi et al.,2012)and cash-holding decisions(Dudley and Zhang,2016).We extend this literature and examine the impact of trust on one important form of corporate investment behavior,M&A decisions.Third,our results show that the effect of trust on M&Asdiffer with formal institution environment,information asymmetry and repeated interactions between economic parties.This conclusion helps to clarify the real reason why trust plays a role in financial transactions,and provides new theoretical premise and empirical evidence for the proposition of when trust plays a role.Fourth,the conclusion of this paper has important policy implications.At present,China is in a critical period of improving the socialist market economic system and the stability of the financial system.However,the frequent occurrence of financial market chaos,such as bond default,enterprise or individual dishonesty,and insider trading,shows that improving the social credit system and improving the level of social trust has become an urgent problem to be solved.The research of this paper has important theoretical value and practical significance to further understand the internal causes of China's economic development and actively promote China's long-term and healthy economic development.The conclusions of this study inspire the government to focus on cultivating and building trust as a public good,urge market participants to be honest,trustworthy,winwin cooperation,and improve the soft environment for investment.This is of great significance to strengthen the construction of social integrity,promote long-term economic growth and capital market prosperity. |
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