The Economic Worth of the Firm's Interorganizational Relationships in Acquisitions: A Social Network Perspective

Motivation: We treat the network position of target firms as a source of value creation in mergers and acquisitions (M&As), and intend to gauge the associated economic value. Premise: We adopt the social network methodology to capture the target firms' network position and relate it to abnormal returns experienced by the acquiring firms on the announcements. Approach: We use a sample of 728 completed acquisitions in the United States from 1990 to 2011 and employ social network analysis and event study methodology to conduct our analysis. Results: We document that the stock market responds positively to the target's centrality. We also find that the combined centrality and the relative centrality of the acquiring firm and the target firm enhance the performance of a particular acquisition. Furthermore, the positive effects of the target firm's centrality on the acquirer's shareholder value creation are stronger when the acquisitions are related deals or the acquirer has prior experience in the target's industry. Conclusion: This study offers a systematic analysis of whether and how a target firm's network position leads to the shareholder value creation of the acquirer. It demonstrates that the externally derived network position and resources of the target firm can influence the stock market's valuation of M&A deals. Consistency: This study provides implications for practitioners with respect to how the acquiring firms assess the targets to create shareholder value in M&A transactions.