Firms of a feather merge together: Caste proximity and M&A outcomes

Abstract

Using data from India, we show that shared caste identities between two firms’ directors increases the likelihood that they enter a merger and acquisition (M&A) deal. Target and acquirer shareholders receive smaller gains in such deals relative to others. Negotiation outcomes and long run firm performance are no better either. These deals represent misallocation of resources away from shareholders and firms towards dealing firms’ directors who extract significant rents. This inefficiency survives in equilibrium amid poor corporate governance.