How does geographical and legal proximity affect the performance of M&A transactions?

Geographical distance and the prevailing legal environment are important factors in cross-border transactions. Using a sample of 1507 worldwide transactions, this article examines the impact of geographical and legal proximity on the performance of M&A transactions. It is found that capital market reactions for targets in Asia Pacific are only about half (10.7%) compared to those in North America (23.5%) or Europe (22.6%). Furthermore, while it is generally believed that geographical distance is harmful, target firms under-perform in transactions with neighbouring countries by up to 8.1%. It seems that acquirers pay less for firms that are close to their own market (negative neighbouring country effect). When looking at legal aspects, the evidence presented here (weakly) supports the view that after a transaction, acquiring firms bootstrap superior governance mechanisms of their targets (bootstrapping hypothesis). Moreover, management of target firms in countries with weaker shareholder rights tends to accept offers too early, while the management of acquirers coming from a weaker legal system tends to overpay (shareholder rights hypothesis).