RSFAS Finance Seminar – Professor Cong Wang

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Speaker: Professor Cong Wang

Institution: CUHK

Title: Vertical Acquisitions, Firm Boundaries, and Social Trust.

Abstract: How do a country’s informal institutions shape the boundaries of firms? We shed light on this question by examining firms’ acquisition decisions in relation to the level of societal trust. We posit that lower trust exacerbates concerns about holdup problems between firms along the supply chain, making vertical integration a more efficient way to organize production. Consistent with our hypothesis, we find that firms are more likely to make vertical acquisitions (but not horizontal ones) in countries with lower trust, especially when formal contract enforcement is weaker or when firms operate in industries more susceptible to holdup problems. Further, vertical acquisitions in low-trust countries generate higher shareholder wealth and operational efficiency improvement than those in high-trust countries. The relation between trust and vertical acquisitions is robust to identification strategies based on instrumental variables for trust and the inherited component of trust, and even persists within the U.S., where we exploit regional differences in trust.

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