Target firm's integrity culture and M&A performance

This study investigates whether the attribute of integrity culture (derived from target firms’ annual reports) influences merger and acquisition (M&A) performance. We find that a target firm's integrity culture, measured from its 10-K reports, has a positive and significant effect on market reaction to the bidder firm's M&A announcement. Our study's analysis is found to be robust to sample selection bias by utilising the entropy balancing technique and to endogeneity concerns by employing an instrumental variable approach. Our results are also robust to alternative measures of integrity culture and when controlling for a target firm's religiosity and corporate social responsibility, an acquirer firm's fixed effects, chief executive officer's fixed effects, governance for corporate control and advisor quality. We identify the retention of a target firm's directors and of its customers as channels that underlie our main findings. Furthermore, we find that acquisition synergies improve, with decreased time taken to complete the deal, for acquisitions of target firms with a higher integrity culture.