CEO Educational Background and Acquisition Targets Selection

Journal of Corporate Finance 52 (2018) 238–259
Contents lists available at ScienceDirect
Journal of Corporate Finance

journal homepage: www.elsevier.com/locate/jcorpfin
CEO educational background and acquisition targets selection☆

T
⁎
Ye Wanga, , Sirui Yinb
a
Eller College of Management, University of Arizona, 1130 E Helen St, Tucson, AZ 85721, USA
b
Farmer School of Business, Miami University, 83 N Patterson Ave, Oxford, OH 45056, USA
A R T IC LE I N F O ABS TRA CT
Keywords: Using hand-collected CEO education data of 3574 CEOs over the period of 2000 to 2015, we
CEO educational background document that CEOs are significantly more likely to acquire targets that are headquartered in
Mergers and acquisitions those states where the CEOs received their undergraduate and graduate degrees. Education-state
Familiarity bias deals are larger, have higher completion rates, and exist with both public and private targets.
JEL classification: Acquirers pay a lower target premium for education-state deals and the cumulative abnormal
G02 announcement returns are positive. The combined evidence suggests that education-state ac-
G34 quisitions are more likely to be driven by bidder CEO's information advantage toward firms
I2
headquartered in the education state.
M12
1. Introduction
It is well documented that CEOs play an important role in corporate merger and acquisition decisions. CEO behavior traits such as
overconfidence (Malmendier and Tate, 2008), narcissism (Aktas et al., 2016), age (Yim, 2013), and home bias (Chung et al., 2018;
Jiang et al., 2018) strongly affect the selection of acquisition targets and acquisition success. This paper attempts to add to the
literature examining the effect of CEOs on merger outcomes by looking at the effect of a CEO's educational background. Specifically,
we ask whether receiving an undergraduate or graduate degree in one state affects a CEO's preference for acquiring firms in that state.
Our research question is motivated by social-networks literature and familiarity-bias literature. As a future CEO gains knowledge
about local firms during her undergraduate and graduate studies, she develops social networks and becomes more familiar with local
firms. When she finally becomes a CEO, due to information advantage or familiarity bias toward education-state targets, she may
prefer targets in her education state. Studying education-state acquisitions is important because acquisitions are one of the most
important corporate decisions. Education-state acquisitions are beneficial if they are driven by acquiring CEO's information ad-
vantage, and detrimental if driven by familiarity bias. We review both strands of literature in detail and develop our hypotheses in
Section 7.
To test whether CEOs prefer targets headquartered in the education state and whether education-state acquisitions benefit
shareholders, we obtain CEO educational background information from the BoardEx dataset. We manually collect school location
data from each school's website. Our sample includes 3574 CEOs from 2074 U.S. public firms, from 2000 to 2015. The main ex-
planatory variable of interest, Education state, is an indicator variable that equals one if the CEO has received education in the
acquisition target state, and zero otherwise. We document that firms are more likely to acquire targets from a CEO's education state
than similar targets from other states. In addition, these education-state acquisitions have a higher completion rate and higher deal
☆
We thank Kathleen Kahle, Sandy Klasa, Richard Sias, Mitch Towner, Aazam Virani, and seminar participants at the University of Arizona for
valuable comments and suggestions.
⁎
Corresponding author.
E-mail address: ywang123@email.arizona.edu (Y. Wang).
https://doi.org/10.1016/j.jcorpfin.2018.08.013
Received 21 January 2018; Received in revised form 25 August 2018; Accepted 28 August 2018
Available online 31 August 2018
0929-1199/ © 2018 Elsevier B.V. All rights reserved.
Y. Wang, S. Yin Journal of Corporate Finance 52 (2018) 238–259
value. The documented relation exists in both public and private targets and is robust to an alternative regression methodology.
We conduct several tests to alleviate endogeneity concerns. First, exploiting CEO turnover, we find that a prior CEO's education
state has no predictive power on a firm's choice of an acquisition target. Second, we show that the likelihood of making an education-
state acquisition is actually lower during the first three years of a CEO's tenure, suggesting that the observed effects are less likely to
be driven by firms strategically hiring CEOs to use their education-state network to complete an acquisition. Third, we conduct
placebo tests, where we randomly assign CEOs to different education states, and we find that a random education connection does not
predict the likelihood of an acquisition. Finally, we consider the possibility that omitted variables related to both the number of
universities and the number of firms in a state could explain our results. We drop the four states with the highest number of
universities and results remain unchanged.
Next, we investigate the potential channels that could explain the higher M&A activities in the education states of CEOs. As
discussed above, a higher propensity of education-state acquisitions could be due to better information through social networks or to
behavioral traits, such as overconfidence, that are related to familiarity bias. We first examine the short-term announcement returns
of education-state acquisitions. We find that both public and private education-state acquisitions have positive announcement re-
turns, indicating that the market is reacting positively to education-state acquisitions.
Next, we examine merger performance by examining target premium (Target premium), combined cumulative abnormal returns
(Combined CAR), and long-term change in operating performance (ΔROA). We find education-state acquisitions are associated with a
lower Target premium, suggesting that the bidder CEOs paying a lower price for targets in the education state. In addition, the
coefficient estimate on Education state is positive and significant in the Combined CAR regression, suggesting that the market perceives
education-state acquisitions as value-enhancing investments. We do not find significant changes in long-term operating performance.
Finally, we explore cross-sectional variation with respect to corporate governance. If education-state mergers are driven by
familiarity bias demonstrated by the acquiring CEOs, the effect should be more prevalent among firms with worse corporate gov-
ernance. Using different proxies for corporate governance, we reject this hypothesis. We find the likelihood of education-state ac-
quisitions is either not significantly related or positively related to corporate governance, suggesting that the observed relation is less
likely to be driven by familiarity bias of CEOs.
This paper contributes to several strands of literature. First, this paper is related to the large amount of literature examining the
motives and outcomes of mergers and acquisitions. Whereas prior literature focuses on identifiable firm and industry characteristics
such as cash holdings, firm size, industry shocks, asset complementarity, and product-market synergy in explaining merger motives
(Harford, 1999, 2005; Moeller et al., 2004; Rhodes-Kropf and Robinson, 2008; Hoberg and Phillips, 2010), and termination fees,
corporate governance, industry links, and technological overlap in explaining merger outcomes (Officer, 2003; Masulis et al., 2007;
Ahern and Harford, 2014; Bena and Li, 2014), this paper belongs to the growing literature that examines the effect of CEO char-
acteristics on mergers motives and outcomes. Prior studies document that the personal wealth of CEOs, along with overconfidence,
age, network centrality, and personal attitudes toward risk, affect acquisition outcomes (Harford and Li, 2007; Malmendier and Tate,
2008; Yim, 2013; El-Khatib et al., 2015; Leung et al., 2017). This paper suggests that a CEO's educational networks also play an
important role in corporate acquisition decisions.
Our study complements two contemporaneous papers that examine the effect of CEO home bias on corporate acquisitions. Jiang
et al. (2018) and Chung et al. (2018) find that CEOs are more likely to acquire targets in their birth state. While their papers conclude
that home-biased acquisitions are in general value decreasing, as home-biased acquisitions are driven by agency problems, our paper
demonstrates that education-state acquisitions are in general value enhancing, due to information advantages from educational
networks.1 To that extent, this paper also adds to the literature on social networks through school ties, which shows that market
participants such as mutual-fund managers and financial analysts benefit from broader educational ties (Cohen et al., 2008; Cohen
et al., 2010).
The rest of our paper is organized as follows. Section 7 develops the main hypotheses of the paper. Section 3 describes the data
collection and the method of sample construction. In Section 4, we discuss the methodology and present the main findings regarding
how education networks affect a firm's acquisition target selection. Section 5 addresses endogeneity problems and reverse causality
concerns. Section 6 provides cross-sectional evidence to test the information channel and the familiarity-bias channel, and Section 7
concludes.
2. Possible effects of educational background on M&A outcomes and related literature
In this section, we first review the literature on familiarity bias that motivates our study. We then develop hypotheses focusing on
how CEO educational background may have an impact on acquisition-target choice. Finally, we provide empirical predictions for the
1
Due to data limitation (the Lexis Nexis Online Public Records Database in Jiang et al. (2018) and the hand-matched database of CEO birthplace
in Chung et al. (2018)), we are unable to add CEO birthplace to our tests. Nevertheless, we hand-collected CEO birth state information from a
random sample of 100 CEOs. The summary statistics suggest that only 17 CEOs received their higher education degrees in their birth-states.
Furthermore, education-state acquisitions made by 13 of these 17 CEOs are excluded from our sample because these CEOs also work in the same
state as their birth-state and education-state, and our acquisition sample only focuses on out-of-state acquisitions. This leads to only four CEOs
whose education state is the same as the home state, making it unlikely that our results are driven by home-state biased acquisitions. In addition, the
above two papers find that home biased acquisitions are value decreasing, which work against the effects shown in this paper. We thank the referee
for pointing this out.
239
rest of the study.
2.1. Literature on familiarity bias
The literature on familiarity bias suggests that people have a tendency to invest in assets that they are familiar with. Earlier
literature focuses on portfolio holdings of individual and institutional investors and finds that investors exhibit familiarity bias, that
they hold domestic assets, local assets, and firms that are managed by CEOs of the same cultural background (e.g. French and Poterba,
1991; Coval and Moskowitz, 1999; Grinblatt and Keloharju, 2001; Pool et al., 2012).
Some recent studies document the existence of familiarity bias outside the stock market. For example, Benartzi (2001) documents
that employees over-allocate their company stock in their 401(k) accounts. Cumming and Dai (2010) document that venture capi-
talists exhibit local bias in their investments. More related to our study are the papers documenting how CEOs also exhibit familiarity
bias, which affects corporate decisions such as the choice of overseas listing venues, divestment, and M&A (Sarkissian and Schill,
2003; Ang et al., 2014; Huang, 2014; Jiang et al., 2018; and Chung et al., 2018).
Motivated by the literature on familiarity bias, we ask whether CEOs exhibit familiarity bias in acquisition-target selections. We
examine a specific type of familiarity bias that leads to acquiring targets in the CEO's state of education. The intuition is that during
their time at college or university, CEOs become more familiar with the firms in their education state. They may exhibit such bias in
acquisitions target selection when they becomes CEOs. This leads to our main hypothesis (H1): CEOs are more likely to make
education-state acquisitions.
2.2. Information channel
We next ask whether education-state acquisitions benefit shareholders of the acquiring company. On one hand, as CEOs build
their social networks during their years at college or university, the extensive social ties in the local area foster an enhanced flow of
information. These social networks provide CEOs with information advantages in their education state and could lead to better
decision-making or target selection in their education state. Social-network literature in general finds that information dispersed via
an educational network leads to better mutual-fund performance, improved analyst forecast accuracy, lower bank-loan interest rates,
and an increased likelihood of winning private equity deals (Cohen et al., 2008; Cohen et al., 2010; Engelberg et al., 2012; Fuchs
et al., 2016).
Under the information advantage theory, education-state acquisitions could be value-enhancing investments because bidder CEOs
process their unique information advantage toward target firms. CEOs could potentially buy the firm at a lower price or find better
matches, which lead to long-term synergy gains. Information-advantage literature suggests that social networks, and especially
educational networks, lower the costs of gathering information and provide CEOs with valuable information. Building on social-
network literature, our second hypothesis (H2) is that CEOs benefit from educational networks, and education-state deals are value
enhancing.
2.3. Familiarity bias channel
On the other hand, decisions made under the influence of familiarity bias are not always optimal (e.g., Grinblatt and Keloharju,
2001; Huberman, 2001; Cao et al., 2009). Pool et al. (2012) find that mutual fund managers are more likely to invest in companies
with headquarters in their birth state, with no evidence of outperformance. Cornaggia et al. (2017) find that credit analysts rate
municipal bonds issued in their birth states more favorably. Following this literature, we predict that education-state acquisitions
could be driven by CEOs who are influenced by the familiarity bias and become overconfident toward targets in the education state.
Some of the theory papers that model the relation between confidence, risk aversion, and investor behaviors include Benos
(1998), Odean (1999) and Hirshleifer and Luo (2001). In the context of CEOs, the literature on CEO overconfidence finds that CEO
overconfidence affects corporate investment (e.g. Malmendier and Tate, 2008; Hirshleifer et al., 2012; Ben-David et al., 2013). If
familiarity bias makes CEOs overconfident regarding education-state targets, CEOs could overpay for target companies and undertake
value-destroying mergers.
In addition, education-state acquisitions may also be influenced by inefficient managerial objectives (e.g., Jensen, 1986; Roll,
1986; Morck et al., 1990). For example, acquiring an education-state firm could increase a CEO's status or popularity among their
alumnus, or give them better access to athletic events. If CEOs engage in these education-state acquisitions for private benefits,
education-state acquisitions may negatively affect the long-term synergy of the acquisition and destroy shareholder value. Therefore,
our third hypothesis (H3) is that education-state acquisitions are driven by familiarity bias, and are thus inefficient.
2.4. Empirical prediction
The preceding hypotheses have the following empirical predictions. First, in Section 4, we use both a state-pair matched sample as
in Pool et al. (2012) and an acquirer-target matched sample as in Bena and Li (2014), to test whether CEOs are more likely to acquire
targets in their education state. Second, to study the motivations behind education-state acquisitions, we examine both the short-term
market reaction (the bidder's cumulative abnormal returns) to the deal announcement and alternative measures of merger perfor-
mance, such as target premium, acquirer and target combined cumulative abnormal returns, and long-term synergy. In addition, if
agency problems or a CEO's behavioral biases drive our results, we expect to see a stronger effect among poorly governed firms.
240
Table 1
Summary statistics.
N Mean Std P25 Median P75
Firm characteristics
Size 16,025 7.374 1.563 6.239 7.269 8.378
B/M 16,025 0.399 3.558 0.246 0.404 0.629
Leverage 16,025 0.219 0.207 0.049 0.223 0.325
ROA 16,025 0.042 0.149 0.021 0.055 0.092
Cash 16,025 0.153 0.167 0.029 0.091 0.22
CAPX 16,025 0.055 0.057 0.021 0.038 0.068
Board independence 11,751 0.754 0.139 0.667 0.778 0.875
G-index 4016 9.443 2.647 8 9 11
E-index 12,159 2.506 1.351 2 2 3
CEO duality 16,025 0.201 0.401 0 0 1
CEO characteristics
Tenure 16,025 5.464 3.891 2 5 8
Male CEO 16,025 0.965 0.183 1 1 1
CEO age 16,025 55.477 7.330 51 55 60
Delta ($000 s) 16,025 539.317 1141.942 40.546 170.432 503.768
Vega ($000 s) 16,025 143.627 242.426 8.310 50.431 163.843
Deal characteristics
Education-state deals 2058 0.105 0.229 0 0 0
Bidder CAR (−1, +1) 2058 −0.001 0.113 −0.034 0.000 0.036
Bidder CAR (−2, +2) 2058 0.005 0.064 −0.021 0.004 0.034
Bidder CAR (−3, +3) 2058 0.007 0.052 −0.024 0.007 0.039
Diversifying deal 2058 0.459 0.498 0 0 1
Tender 2058 0.034 0.182 0 0 1
Friendly 2058 0.975 0.154 1 1 1
Stock deal 2058 0.078 0.268 0 0 1
Cash deal 2058 0.410 0.492 0 0 1
Diversifying deal 2058 0.028 0.164 0 0 0
Initial industry bidder 2058 0.124 0.329 0 0 0
Frequent acquirer 2058 0.863 0.343 1 1 1
Deal value (in $ million) 2058 415.151 1058.537 25.696 88.000 294.502
Relative size 2058 0.299 0.462 0.048 0.132 0.303
Number of bidders 2058 1.020 0.164 1 1 1
Target premium 601 0.601 0.428 0.273 0.484 0.799
Combined CAR 601 0.024 0.080 −0.012 0.012 0.057
ΔROA 601 −0.028 0.132 −0.039 −0.009 0.019
This table presents summary statistics for the main variables used in the analysis. The sample includes 16,025 firm-year observations from 2000 to
2015 and includes 2037 unique firms managed by 3574 unique CEOs with available education information. All variables are defined in the
Appendix.
Section 6 provides a more detailed discussion of each test.
3. Data and sample construction
Our initial sample includes all CEOs with their education background information available on the BoardEx database. The
BoardEx database provides detailed information on CEO education histories, including the institutions at which they studied, the
degrees that they earned, and their years of attendance. The availability of CEO education data from BoardEx restricts our sample
period from 2000 to 2015. We focus on three types of degrees: bachelor's, master's, and doctorates, because these degrees take a
longer period to complete, which allows CEOs to achieve a firmer attachment to their education states. We focus on completed
degrees before a CEO appointment date, and we exclude all foreign institutions.
We obtain mergers and acquisitions variables from the Securities Data Company (SDC) Platinum database. We focus on all
domestic mergers and acquisitions announced between 1/1/2000 and 12/31/2015. Following prior literature, we further require
that: (1) the deal value is greater than $1 million, (2) the target is in the U.S., and (3) the acquirer is a public firm listed on Center for
Research in Security Prices (CRSP) and Compustat during the event window (Moeller et al., 2004). Prior studies show that firms are
more likely to acquire geographically coterminous targets (Kang and Kim, 2008; Uysal et al., 2008; Chakrabarti and Mitchell, 2013);
we thus exclude in-state acquisitions from our analysis. To measure value changes around merger announcement, we obtain stock-
return data from CRSP. We obtain other CEO characteristics from the ExecuComp database and firm-level accounting information
from Compustat. Finally, we construct governance proxies using data from the Institutional Shareholder Services (ISS). Our final
sample consists of 2074 unique firms and 3574 unique CEOs from 2000 to 2015. Table 1 reports summary statistics of the main
sample.
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4. CEOs education-state mergers and acquisitions
4.1. Baseline results
Following prior literature on the effect of familiarity bias on target choice, we employ a firm-state pair model to examine whether
CEOs are more likely to acquire targets in the state of education (Pool et al., 2012; Tate and Yang, 2016; Jiang et al., 2018).
Specifically, we pair each firm-year observation with 50 states and Washington D.C. Using firm-state-year observations, we estimate
the following regression:
Yi, r , s, t = βe Education statei, s, t + CEO Controlsi, s, t + Firm Controlsi, s, t − 1 + δj, t + γr , s, t + ηi + ϵi, s, t
where the dependent variable Yi, r, s, t is: 1) the number of M&A attempts that firm i makes in state s during year t (N attempts); 2) the
number of completed deals firm i makes in state s during year t (N completed); and 3) the transaction value of firm i's acquisitions in
state s during year t scaled by the total transaction value of acquisitions made by the same CEO in that year (DV/TV). The variable of
interest is Education state, which is an indicator variable that equals one if the CEO of firm i received an education in state s.
Throughout the paper, we define industry at the two-digit SIC level. If CEOs have a preference for targets located in their education
states, we expect the coefficient on βe to be positive.
To control for the general propensity of firms to make acquisitions, we include a set of firm characteristics that have been
documented to affect acquisition decisions (e.g., Harford, 1999; Cai et al., 2011). These controls include firm size, ROA, book-to-
market ratio, financial leverage, cash, and CAPX. We also include CEO characteristics that have been shown to affect merger like-
lihood. First, we include CEO age and tenure. Yim (2013) shows that the propensity to conduct acquisition decreases with CEO age
but increases with CEO tenure. Second, following Coles et al. (2006), we include a CEO's risk-taking incentives measured by total
compensation delta and vega. Finally, following Campbell et al. (2011), we include a measure of CEO overconfidence. We provide
detailed definitions of all variables in the Appendix.
We include a series of fixed effects to control for heterogeneity across firms, industries, and states. First, we include firm fixed
effects ηi to control for omitted time-invariant firm characteristics. Second, following Harford (2005), we include industry-by-year
fixed effects, δj, t, based on the two-digit SIC industry, to control for variations in the propensity of firms in different industries to
engage in mergers and acquisitions. Finally, firms in certain states may have different propensities to acquire targets from different
states, due to the effects of physical distance or other linkages across states, such as those induced by industry agglomeration. We thus
include time-varying state-pair-year fixed effects, γr, s, t, r is the acquirer firm's headquarter state, s is the target firm's headquarter
state, and t denotes year. In all regressions, we cluster standard errors at the firm level.
Table 2 reports the baseline results. The dependent variable in column (1) is the number of M&A attempts firm i makes in state s
during year t. The positive coefficient on Education state suggests that firms are more likely to make M&A attempts in their CEO's
education state. Given the unconditional probability of making an acquisition in a state is 0.005, the coefficient estimate implies that
the CEOs are 2.8 times (0.014/0.005) more likely to acquire targets in the education state.2 In column (2), we study the effect of the
bidder CEO's education experience in a given state on the likelihood of their firms completing a deal in that state. The coefficient on
the Education state is also positive and statistically significant. Given the unconditional probability of completing a deal in a state is
0.004, the coefficient estimate implies that the firms are 1.25 times (0.005/0.004) more likely to complete a deal in its CEO's
education state. Finally, the dependent variable in column (3) is the dollar amounts spent on acquisitions in a CEO's education state
scaled by the total transaction value made by the same CEO in the same year. The coefficient estimate on Education state is also
positive and significant, suggesting that CEOs are more likely to pick larger targets in education-state acquisitions.
In sum, the results in Table 2 provide support to our main hypothesis that CEOs are more likely to acquire targets in their
education state. In addition, we find that education-state acquisitions have a higher completion rate and are larger compared to other
acquisitions executed in the same year. Combined, this evidence supports our main hypothesis, which predicts that familiarity with
education-state firms makes CEOs more likely to acquire targets in their education state.
4.2. Public vs. private targets acquisitions
Prior literature on M&A suggests that, compared with acquisitions of public targets, acquisitions of private targets have smaller
deal sizes and receive less public attention (Fuller et al., 2002; Betton et al., 2008). To study whether a CEO's preference for edu-
cation-state targets differs when it comes to public versus private acquisitions, we estimate the baseline regression on public and
private targets separately. In Table 3, columns (1) to (3) report the regression results for the subsample of acquisitions for public
targets, and columns (4) to (6) report the results for the subsample of acquisitions for private targets (including both private and
subsidiary).
First, we examine the effect of education networks on the frequency of acquisitions in columns (1) and (4) of Table 3. The
coefficient estimates on Education state are 0.002 and 0.011 for public and private acquisitions, respectively. The evidence suggests
that education-state acquisitions happen to both public and private targets. Note that the coefficient estimate on Education state is
significantly larger for private targets. To the extent that information about private companies is harder to obtain, the evidence is
2
The unconditional probability of making an acquisition in a state is the average value of the deal dummy in the full firm-state paired sample
(Pool et al., 2012; Tate and Yang, 2015; Jiang et al., 2018).
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Table 2
Educational-state acquisitions.
N attempts N complete DV/TV
(1) (2) (3)
Education state 0.014** 0.005*** 0.003***

(2.166) (2.908) (2.882)
Size 0.005*** 0.002*** 0.001***
(4.461) (4.411) (5.995)
B/M −0.000* 0.000 0.000
(−1.671) (0.192) (0.386)
Leverage −0.003 0.000 0.001
(−0.957) (0.335) (1.582)
Cash −0.014*** −0.009*** −0.004***
(−2.848) (−4.664) (−3.983)
ROA 0.003 0.002*** 0.001**
(1.566) (2.605) (1.979)
CAPX 0.038** 0.002 0.002
(2.157) (0.656) (0.752)
CEO age 0.000 0.000 0.000
(0.746) (0.544) (0.118)
CEO tenure −0.000 −0.000 −0.000
(−0.837) (−0.820) (−0.445)
Male CEO −0.003 −0.002** −0.002***
(−1.262) (−2.368) (−2.717)
Delta −0.000 0.000 0.000***
(−0.978) (1.182) (4.611)
Vega 0.000** 0.000 −0.000
(2.137) (1.572) (−0.125)
CEO overconfidence 0.001 0.000 0.001***
(1.107) (1.090) (2.904)
Industry-year FE Yes Yes Yes
Firm-state FE Yes Yes Yes
Firm FE Yes Yes Yes
N 629,824 629,824 629,824
Adjusted R2 0.122 0.029 0.022
This table reports the results on the relation between education state and merger outcomes. N attempts is the number of M&A attempts
made by the acquiring firm i in state s during year t. N complete is the number of completed deals made by the acquiring firm i in state s
during year t. DV/TV is the total transaction value of firm i's acquisitions in state s scaled by the total transaction value made by firm i
during year t. Education state is an indicator variable that equals one if the CEO has received a degree from state s, and zero otherwise.
The remaining variable definitions are in the Appendix. Robust standard errors are clustered at the firm level and t-statistics are in
parentheses. Significance levels are denoted by ⁎, ⁎⁎, ⁎⁎⁎, which correspond to the 10%, 5%, and 1% levels, respectively.
more consistent with our second hypothesis that education-state acquisitions are driven by information advantage. We provide more
analysis to distinguish between the two channels in Section 6.
Second, in columns (2) and (5), we examine the effect of educational networks on the number of completed deals. The coefficient
estimates are again positive and significant, suggesting that CEOs are more likely to make successful acquisitions in the education
state. Finally, in columns (3) and (6), we examine the effect of educational networks on the dollar amount spent on acquisitions in a
CEO's education state scaled by the total transaction value made by the same CEO in the same year. The coefficient estimates on
Education state are significantly positive for both public and private acquisitions, suggesting that bidder CEOs spend a larger pro-
portion of the acquisition budget on education-state targets.
4.3. Alternative methods
We check the robustness of our results following an alternative approach similar to Rhodes-Kropf and Robinson (2008) and Bena
and Li (2014). Specifically, we create a hypothetical target pool (pseudo-target) and a hypothetical acquirer pool (pseudo-acquirer)
and estimate the effect of educational background in acquisition target selection in these two samples.
For the pseudo-target sample, we focus on deals with a public target. We start with a list of firms that operate in the same two-
digit SIC industry as the actual target. We narrow the list by only keeping the companies in the same market capitalization and book-
to-market quintiles as the actual target firms. We also require hypothetical targets not to have participated in any merger in a four-
year window (−2, +2) around the announcement date. If no company meets the above criteria, we remove the book-to-market
restriction and only use the industry and size restrictions. Our matched sample includes 12,156 actual and pseudo targets, with an
average of 23 pseudo targets for each merger. Following the same methodology, we create a pseudo-acquirer sample, though please
note that this sample is restricted to firms for which we have CEO education data. The matched sample includes 1835 actual and
pseudo acquirers, with an average of 4 pseudo acquirers for each merger.
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Table 3
Educational-state acquisitions among public and private targets.
Public targets Private targets
N attempts N complete DV/TV N attempts N complete DV/TV
(1) (2) (3) (4) (5) (6)
Education stat 0.002*** 0.001* 0.002*** 0.011** 0.003** 0.002**

(2.772) (1.930) (2.977) (1.997) (2.558) (2.267)
Size 0.000** 0.000*** 0.000*** 0.005*** 0.001*** 0.001***
(2.334) (3.165) (2.820) (4.588) (3.672) (4.911)
B/M −0.000 −0.000 −0.000 −0.000 0.000 0.000
(−0.884) (−1.331) (−0.648) (−1.562) (0.459) (0.364)
Leverage 0.000 0.000 0.000 −0.003 0.001 0.001
(0.740) (0.111) (0.883) (−1.055) (0.591) (1.169)
Cash −0.001 −0.001** −0.001* −0.011*** −0.007*** −0.004***
(−1.452) (−2.301) (−1.844) (−2.649) (−4.108) (−4.140)
ROA 0.000 0.000 0.000 0.003 0.002*** 0.001**
(0.209) (0.937) (0.131) (1.630) (2.633) (2.353)
CAPX −0.002 −0.002* −0.002* 0.040** 0.006* 0.004
(−1.448) (−1.746) (−1.823) (2.333) (1.802) (1.500)
CEO age −0.000** −0.000 −0.000* 0.000 0.000 0.000
(−1.987) (−1.338) (−1.878) (1.105) (0.942) (1.044)
CEO tenure 0.000 0.000 0.000 −0.000 −0.000 −0.000
(1.181) (0.185) (0.607) (−0.928) (−0.604) (−0.627)
Male CEO −0.001** −0.000 −0.000 −0.002 −0.001* −0.002**
(−1.993) (−1.349) (−1.423) (−0.835) (−1.775) (−2.370)
Delta 0.000 0.000*** 0.000*** −0.000 −0.000*** −0.000***
(0.635) (5.278) (5.933) (−1.447) (−3.057) (−2.990)
Vega 0.000 −0.000 −0.000 0.000** 0.000** 0.000
(1.641) (−0.252) (−0.920) (1.999) (2.105) (0.771)
CEO overconfidence 0.000** 0.000* 0.000** 0.001 0.000 0.001***
(2.329) (1.854) (2.004) (0.897) (0.630) (2.630)
Industry-year FE Yes Yes Yes Yes Yes Yes
Firm-state FE Yes Yes Yes Yes Yes Yes
Firm FE Yes Yes Yes Yes Yes Yes
N 629,824 629,824 629,824 629,824 629,824 629,824
Adjusted R2 0.025 0.010 0.011 0.098 0.026 0.019
This table reports the results on the relation between education state and merger outcomes for public and private targets. Columns (1) to (3) report
regression results for the sample of acquisitions for public targets. Columns (4) to (6) report regression results for the sample of acquisitions for
private targets (including both private targets and subsidiaries). Education state is an indicator variable that equals one if the CEO has received a
degree from state s, and zero otherwise. The remaining variable definitions are in the Appendix. Robust standard errors are clustered at the firm
level and t-statistics are in parentheses. Significance levels are denoted by ⁎, ⁎⁎, ⁎⁎⁎, which correspond to the 10%, 5%, and 1% levels, respectively.
Following Bena and Li (2014), we estimate a conditional logit regression where the dependent variable is set to zero if the deal is a
pseudo-deal. We use the same control variables as used in the main analysis. Table 4 reports the results from the conditional logit
model. The coefficient on Education state continues to load positive and significant in all four columns, suggesting that a CEO is
significantly more likely to acquire targets in the state where she has received an education and that targets are more likely to merge
with a firm whose CEO has received an education in that state. In terms of the economic significance, the coefficient on Education state
in column (1) suggests that CEOs are 36% more likely to acquire a target from their education state, than an otherwise similar target
in another state, after controlling for bidder, CEO, and industry characteristics. In column (3), the estimated coefficient on Education
state suggests that targets are 15% more likely to receive a bid from firms whose CEOs have received an education in the target state.3
Finally, the coefficients on Education state in columns (2) and (4) suggest that a bid is more likely to go through if the bidder CEO has
received an education in the target state.
5. Endogeneity and reverse causality
The evidence so far suggests that firms are more likely to acquire targets that are headquartered in the states where CEOs received
at least a bachelor's degree. However, endogeneity and reverse causality could explain our results. First, omitted variables correlated
with both the availability of acquisition targets and CEO education could explain our results. For example, it is possible that the states
3
The estimate is comparable to two studies that examine the effect of home-biased acquisitions (Chung et al., 2018; Jiang et al., 2018). Chung
et al. (2018) find that “actual mergers are 29.3% more likely to be selected when the CEO grew up in the target state.” Jiang et al. (2018) report that
“acquiring in the CEO's home state decreases the large loss likelihood by 11.10 percentage points, which is about half of the unconditional
probability of transacting in a large loss deal (20.46%).”
244
Table 4
Matched sample analysis.
Pseudo-target Pseudo-bidder
N attempts N complete N attempts N complete
(1) (2) (3) (4)
Education state 0.694*** 0.800*** 0.361** 0.393**

(3.731) (4.274) (2.564) (2.285)
Size 0.116** −0.025 −0.208*** −0.280***
(2.052) (−0.488) (−4.063) (−6.320)
B/M −0.162 0.148 −0.072** −0.042*
(−0.576) (0.633) (−2.056) (−1.714)
Leverage 0.284 0.176 0.782*** 0.753***
(0.565) (0.366) (2.853) (2.847)
Cash −0.675 −1.064* −2.888*** −2.805***
(−0.944) (−1.735) (−4.807) (−4.461)
ROA 0.288 0.766 −0.158 −0.374
(0.261) (0.877) (−0.651) (−1.252)
CAPX −0.777 0.475 −2.233** −2.283*
(−0.395) (0.317) (−1.987) (−1.730)
CEO age −0.017 −0.007 0.003 0.008
(−1.330) (−0.564) (0.335) (0.864)
CEO tenure −0.007 −0.022 0.025* 0.014
(−0.260) (−0.740) (1.783) (0.835)
Male CEO 0.936 0.425 0.186 0.121
(1.516) (0.576) (0.641) (0.440)
Delta 0.000*** 0.000 −0.000 −0.000
(4.364) (1.403) (−0.398) (−1.038)
Vega −0.000 −0.000 0.000* 0.000**
(−1.362) (−0.264) (1.940) (2.268)
Overconfidence −0.066 0.152 −0.189* −0.079
(−0.336) (0.842) (−1.766) (−0.678)
Constant −2.854*** −2.366** 0.056 −0.538
(−3.335) (−2.310) (0.077) (−0.859)
Industry-year FE Yes Yes Yes Yes
Firm-state FE Yes Yes Yes Yes
Firm FE Yes Yes Yes Yes
N 13,029 13,029 7687 7687
Adjusted R2 0.089 0.056 0.030 0.032
This table reports coefficient estimates from conditional logit regressions of acquisition on education state. In the pseudo-target subsample, for each
actual merger with a public target, we create a pool of hypothetical targets from among firms in the same two-digit SIC industry that are closest in
size and book-to-market quartile to the actual target. In the pseudo-bidder subsample, we create a pool of hypothetical bidder from among firms in
the same two-digit SIC industry that are closest in size and book-to-market quartile to the actual bidder with available CEO education information.
Education state is an indicator variable that equals one if the CEO has received a degree from state s, and zero otherwise. The remaining variable
definitions are in the Appendix. Robust standard errors are clustered at the firm level and z-statistics are in parentheses. Significance levels are
denoted by ⁎, ⁎⁎, ⁎⁎⁎, which correspond to the 10%, 5%, and 1% levels, respectively.
with the greatest number of universities are also the location of the headquarters for most firms. If so, the omitted correlation
between the number of universities and the number of acquisition targets could explain our results. Secondly, these findings could be
driven by reverse causality. It is possible that firms experience shocks in their investment-opportunity sets and dynamically change
their investment policies. Consequently, they hire a new CEO to exploit her information advantages in the education state where the
acquisition target is headquartered. Such an inference, however, does not contradict the hypothesis; in fact, it validates the hy-
pothesis because this would mean that firms are aware of the information advantages of CEOs. Nevertheless, we perform several tests
to limit its impact on our results.
5.1. CEO turnover
First, we exploit CEO turnovers to examine whether firms continue to exhibit preferences for targets that are headquartered in the
prior CEO's education state after the turnover. If a CEO's preference toward her alma mater explains the observed education-state
acquisitions, the effect should go away after a CEO turnover. However, if omitted variables drive our results, the prior CEO's edu-
cation state should continue to have a significant impact on the firm's M&A activities. Empirically, we include both the current CEO's
education state and the prior CEO's education state into the regression.
Table 5 provides the estimation results. The dependent variable in column (1) is the number of M&A attempts that firm i makes in
state s during year t. The coefficient estimate on Current CEO's education state is significantly positive, while the estimate on the Prior
CEO's education state is not statistically significant, suggesting that the preference for education-state targets disappears after the CEO
245
Table 5
Prior CEO education-state acquisitions.
(1) (2) (3)
Prior CEO's education state 0.003 0.002 0.001

(1.201) (1.130) (0.920)
Current CEO's education state 0.008*** 0.003*** 0.003***
(2.850) (2.887) (3.148)
Size 0.004*** 0.001*** 0.001***
(6.065) (4.572) (5.535)
B/M −0.000 0.000 0.000
(−1.257) (0.691) (0.664)
Leverage −0.003 0.001 0.001
(−1.369) (0.884) (1.599)
Cash −0.008*** −0.006*** −0.004***
(−3.280) (−4.101) (−3.814)
ROA 0.002** 0.002*** 0.001**
(2.049) (3.133) (2.275)
CAPX 0.012* 0.002 0.000
(1.796) (0.623) (0.040)
CEO age 0.000 0.000 0.000
(1.079) (0.436) (0.129)
CEO tenure −0.000 −0.000 −0.000
(−0.953) (−0.262) (−0.249)
Male CEO −0.002 −0.001** −0.002***
(−1.611) (−2.404) (−3.169)
Delta −0.000 0.000*** 0.000***
(−0.096) (3.531) (4.190)
Vega 0.000** 0.000 −0.000
(2.327) (1.463) (−0.139)
CEO overconfidence 0.002*** 0.001 0.001***
(2.637) (1.600) (2.639)
Firm FE Yes Yes Yes
N 629,824 629,824 629,824
Adjusted R2 0.034 0.014 0.014
This table reports the results of the effect of education state on merger outcomes. Prior CEO's education state is an indicator variable that equals
one if the prior CEO has received an education in state s, and zero otherwise. Current CEO's education state is an indicator variable that equals
one if the CEO has received a degree from state s, and zero otherwise. The remaining variable definitions are in the Appendix. Robust standard
errors are clustered at the firm level and t-statistics are in parentheses. Significance levels are denoted by ⁎, ⁎⁎, ⁎⁎⁎, which correspond to the
10%, 5%, and 1% levels, respectively.
turnover. In column (2), the model tests how a prior CEO's experience in higher education in a certain state affects the number of
completed deals that the acquirer firms make in that state. Similarly, we find that Prior CEO's education state has no significant effect
on the number of completed deals that firms make in that state. The dependent variable in column (3) is the transaction value
invested in state s by the current CEO during year t scaled by the total transaction value made by the same CEO in that year. The
coefficient estimate on Current CEO's education state is statistically significant while the estimate on the Prior CEO's education state is
not significant, suggesting that a prior CEO's experience in higher education does not affect a firm's M&A choices in terms of
transaction value and deal type. Overall, this test provides more evidence that the relation documented above is not driven by
omitted variables.
5.2. R-squared movements
Following Altonji et al. (2005) and Oster (2017), we next assume that the selection on observables is proportional to the selection
on unobservables to quantify how large the effect of the omitted variables has to be, compared to the control variables, to invalidate
the main findings in Table 2. The greater the measure of influence δ has to be, the lower the concern about the presence of important
omitted variable bias. The results are provided in Table 6. The key information is in the last row, where the parameter δ is displayed.
All computed δ for the estimates in columns (1) to (3) are higher than one, the threshold considered to define whether the results are
robust (Oster, 2017). More specifically, δ is 3.252 in column (1), 3.558 in column (2), and 3.313 in column (3), suggesting that the
effect of omitted variables in all three models needs to be at least three times stronger than that of the observables in order for the
Education state to lose its significance. Overall, the main results from Table 2 do not suffer from omitted variables that are possibly
correlated with both the dependent and independent variables.
246
Table 6
Selection on unobservables.
(1) (2) (3)
Coefficient 0.014⁎⁎ 0.005⁎⁎⁎ 0.003⁎⁎⁎

R-squared (0.122) (0.029) (0.022)
Oster δ 3.252 3.558 3.313
This table reports the importance of omitted variable bias, measured using Oster (2017)’s δ, for the OLS regressions in
Table 2. Oster δ measures the ratio of the explanatory power of omitted variables relative to the included observable
variable of interest necessary to erase the impact of the variable of interest. The common cutoff is one, which suggests that
the omitted variables must be at least as important as the included observables to explain away our results. A greater-than-
one Oster δ implies that the omitted variables must be more important than our included observed variables to erase our
results. Oster δ is calculated assuming Rmax = 1.3 R-squared and βe = 0.
5.3. Reverse causality: CEO tenure
We next test the timing of the education-state deals to examine the possibility that firms hire a CEO to exploit her education-state
information advantages. It is possible that firms experience shocks in their investment opportunity sets and dynamically adjust their
policies. Consequently, they hire a new CEO to exploit her education-state connections to make acquisitions. For example, an oil firm
headquartered in New Mexico may want to make acquisitions to grow and, given the greater concentration of targets in Texas, may
hire a CEO who has been educated in Texas in order to exploit her connections. To address this concern, we create Short tenure, which
is an indicator variable that equals one if the CEO tenure is < 3 years. If firms hire new CEOs aiming to exploit their education-state
acquisition skills, the timing of such acquisition should be early in a CEO's tenure.
Table 7 reports the estimation results. The dependent variable in column (1) is the number of M&A attempts that firm i makes in
state s during year t. The positive coefficient on Education state confirms that firms are more likely to make M&A attempts in their
CEO's education state. In addition, the coefficient estimate on the interaction term between Education state and Short tenure is negative
and significant, suggesting that CEOs are less likely to make education-state acquisitions during the early part of their tenure. The
model in column (2) focuses on the number of completed deals that firm i makes in state s during year t and the model in column (3)
studies how a CEO's experience in higher education in a given state affects the deal value. In each case, the coefficient estimates on
Education state are significantly positive. Moreover, in both cases, coefficient estimates on the interaction term are not statistically
different from zero. The evidence here suggests that the observed education effect is less likely to be driven by reverse causality.
5.4. Placebo test
We conduct a placebo test to further check the robustness of the baseline results. Specifically, following Bernile et al. (2017), we
randomly assign an education state to each acquirer CEO based on the sample distribution of U.S. states. With the placebo education
state, we re-estimate the baseline OLS regressions with the full set of controls, record the coefficients on the placebo Education state
and their significance levels, and repeat this process 500 times. If the observed effect comes from the acquiring CEO's school con-
nection, the placebo Education state should not be significantly related to the propensity to acquire targets in that state. Empirically,
we should reject the null of a zero coefficient at the 5% significance level, 5% of the time.
Table 8 reports the average coefficient for the main independent variables, N attempts, completed, and DV/TV over the 500
repetitions and the percentage of coefficients that are significant at the 5% level. The coefficient estimates on Education state are
significant at 5% for only 4.6%, 1.8%, and 2.4% of the time. Overall, the placebo test results suggest that the acquiring CEO's school
connection reflects an economically meaningful characterization of geographically based managerial incentives, as opposed to
random noise.
5.5. Correlation between the number of universities and the number of firms
We consider the possibility that states with the most universities happen to be the states with the most firms. If so, an omitted
variable that simultaneously affects the number of acquisition targets and the possibility that CEOs receive an education in that state
could explain our results. To alleviate such concern, we drop CEOs who received their education from the four states with the greatest
number of universities: California, New York, Pennsylvania, and Texas.4
We estimate the effect of education state on merger outcomes using the rest of the observations in Table 9. The estimation results
are consistent with those provided in Table 2. For example, in column (1), the coefficient on Education state is positive and significant,
suggesting that CEOs are more likely to acquire targets in their education state. Similarly, evidence in columns (2) to (3) shows that
firms are more likely to complete a deal in their CEO's education state, and the education-state deals are larger than other cross-state
4
We obtain this information from U.S. News & World Report. https://www.usnews.com/news/best-states/slideshows/10-most-educated-states.
247
Table 7
Timing of educational-state acquisitions.
(1) (2) (3)
Education state 0.023** 0.005* 0.002*

(2.111) (1.923) (1.729)
Short tenure 0.001 0.000 −0.000
(1.091) (0.232) (−0.217)
Education state x Short tenure −0.017* −0.002 0.001
(−1.672) (−0.495) (0.348)
Size 0.005*** 0.002*** 0.001***
(4.328) (4.140) (5.973)
B/M −0.000* 0.000 0.000
(−1.650) (0.156) (0.402)
Leverage −0.003 0.000 0.001
(−0.942) (0.243) (1.595)
Cash −0.014*** −0.009*** −0.004***
(−2.859) (−4.577) (−3.982)
ROA 0.003 0.002** 0.001**
(1.566) (2.522) (1.986)
CAPX 0.038** 0.002 0.002
(2.144) (0.704) (0.740)
CEO age 0.000 −0.000 −0.000
(0.470) (−0.051) (−0.198)
Male CEO −0.003 −0.002** −0.002***
(−1.288) (−2.329) (−2.745)
Delta −0.000 0.000 0.000***
(−1.015) (0.069) (4.571)
Vega 0.000** 0.000* −0.000
(2.126) (1.714) (−0.174)
(1.113) (1.070) (2.867)
Firm FE Yes Yes Yes
N 629,824 629,824 629,824
Adjusted R2 0.034 0.014 0.013
This table reports the results on the relation between education state and merger outcomes. Education state is an indicator variable that equals
one if the CEO has received a degree from state s, and zero otherwise. Short tenure is an indicator variable that equals one if the CEO's tenure is
less than three years, and zero otherwise. The remaining variable definitions are in the Appendix. Robust standard errors are clustered at the
firm level and t-statistics are in parentheses. Significance levels are denoted by ⁎, ⁎⁎, ⁎⁎⁎, which correspond to the 10%, 5%, and 1% levels,
respectively.
Table 8
Placebo test: random assignment of education states.
(1) (2) (3)
Education state −0.00002 −0.00003 −0.00001

% > 5% Significance 4.60% 1.80% 2.40%
Firm controls Yes Yes Yes
Firm FE Yes Yes Yes
This table reports the results on the relation between education state and merger outcomes. Each CEO is randomly assigned an
education state based on the sample distribution of education states. We estimate the main regression with the full set of controls,
record the coefficient and p-value, and repeat the procedure 500 times. The reported coefficient is the mean coefficient across 500
replications. % > 5% Significance reports the percentage of coefficient estimates that are positive and significant at the 5% level. All
regressions include firm, industry-year, and state-pair-year fixed effects. The Appendix provides definitions of all the variables.
Standard errors are clustered at the firm level. ⁎, ⁎⁎, and ⁎⁎⁎ denote significance at the 10%, 5%, and 1% level, respectively.
deals. Overall, the evidence in Table 9 suggests that the observed education-state effect in M&A activities is less likely to be driven by
an omitted variable that simultaneously affects the number of acquisition targets and the possibility that CEOs receive education in
that state.
248
Table 9
Exclude states with the greatest number of universities.
(1) (2) (3)
Education state 0.008*** 0.003*** 0.022***

(3.027) (2.729) (2.942)
Size 0.004*** 0.001*** 0.009***
(4.721) (3.292) (5.063)
B/M −0.000 0.000* 0.000
(−0.256) (1.719) (1.414)
Leverage −0.003 0.001 0.012**
(−1.403) (0.991) (2.385)
Cash −0.011*** −0.005*** −0.027***
(−3.368) (−3.283) (−3.522)
ROA 0.002 0.002** 0.006*
(1.554) (2.544) (1.686)
CAPX −0.002 −0.003 −0.018
(−0.317) (−0.757) (−1.054)
CEO age 0.004*** 0.002*** 0.001***
(2.968) (3.254) (3.757)
CEO tenure −0.000 0.000 0.000
(−0.121) (0.976) (1.224)
Male CEO −0.001 0.002* 0.002**
(−0.296) (1.677) (2.430)
Delta −0.017** −0.007** −0.003**
(−2.128) (−2.530) (−2.382)
Vega 0.002 0.002* 0.001
(0.605) (1.812) (0.968)
(0.815) (1.354) (2.945)
Firm FE Yes Yes Yes
N 473,293 473,293 473,293
Adjusted R2 0.045 0.032 0.035
This table reports the results on the relation between education state and merger outcomes, after excluding the four states with the
greatest number of universities: California, New York, Pennsylvania, and Texas. Education state is an indicator variable that equals one
if the CEO has received a degree from state s, and zero otherwise. The remaining variable definitions are in the Appendix. Robust
standard errors are clustered at the firm level and t-statistics are in parentheses. Significance levels are denoted by ⁎, ⁎⁎, ⁎⁎⁎, which
correspond to the 10%, 5%, and 1% levels, respectively.
6. Information vs. familiarity bias channel
The results documented above suggest CEOs are indeed more likely to acquire targets in their education state. The next question is
whether the observed education-state acquisitions benefit acquirer shareholders. The hypotheses developed in Section 7 suggest that
both the information channel and the familiarity-bias channel could explain the increase. This section is dedicated to disentangling
the two channels. Note the possibility that the observed education-state deals are driven by both familiarity bias and information
advantages. The tests below capture the net effect of the two forces.
6.1. Market reaction to education-state acquisitions
First, we investigate the stock market's reaction to the merger announcement. If familiarity bias induces CEOs to prefer targets
that are located in their education states, we should expect to see unfavorable market reactions to these education-state deals. On the
other hand, if CEOs exploit their information advantage toward targets that are headquartered in their education state, the stock
market reaction should be positive.
We follow Harford (1999) and calculate acquiring firms' cumulative abnormal returns (CARs) surrounding the acquisition an-
nouncement date. Specifically, we estimate the loadings in the market model using the CRSP value-weighted market return as the
benchmark over the 200-day period ending 11 days before the announcement date, and we use three-day, five-day, and seven-day
event windows to estimate the cumulative abnormal returns.
Fig. 1 plots the bidder's average cumulative abnormal returns around the announcement of education-state acquisitions and non-
education-state acquisitions. Among public target acquisitions, education-state acquisitions have less negative returns. Compared to
public target acquisitions, private target deals on average have positive announcement returns. Among private target acquisitions,
education-state acquisitions have more positive cumulative announcement returns during the three-day, five-day, and seven-day
windows. Overall, the evidence from Fig. 1 suggests that the market reacts less negatively for education-state public deals and more
249
Fig. 1. Bidders cumulative abnormal returns.
positively for education-state private deals.

Next, using deal-level observations, we estimate the following regression:
CARi, j, t = δj, t + βe Education statei, t + Deal Controli, t + Firm Controlsi, t − 1 + ϵi, j, t
where CARi, j, t is the acquirer's three-day, five-day, and seven-day CAR. The variable of interest is Education state, which equals one if
the acquirer CEO received education in the target state. Besides the same firm-level control variables used in the baseline regressions,
we also include deal-level control variables that are commonly used in studies that examine deal announcement returns.5 Specifically,
we include method of payment (Stock and Cash), friendly deals (Friendly), tender offer (Tender), number of bidders (Number of
bidders), diversifying deals (Diversifying), serial acquirer (Serial), initial industry bidder (Initial bidder), frequent acquirer (Frequent),
5
For example, Bradley et al. (1988), Schwert (2000), Fuller et al. (2002), Harford (2005), and Cai et al. (2011).
250
Table 10
Acquirer announcement returns.
CAR(−1,+1) CAR(−2,+2) CAR(−3,+3)
All Deals Public targets Private All Deals Public targets Private targets All deals Public targets Private targets
targets
(1) (2) (3) (4) (5) (6) (7) (8) (9)
Education state 0.018* 0.022* 0.015 0.025** 0.032** 0.026** 0.037** 0.023* 0.045**
(1.778) (1.916) (1.623) (2.222) (2.375) (2.035) (2.212) (1.867) (2.353)
Size −0.004*** −0.005 −0.002* −0.004*** −0.004 −0.001 −0.004* −0.004 −0.001
(−3.754) (−1.597) (−1.892) (−2.782) (−0.773) (−0.410) (−1.803) (−0.687) (−0.314)
B/M 0.000 −0.000 0.000 0.002 −0.013 0.001 −0.002 −0.033 −0.003
(0.078) (−0.025) (0.166) (0.763) (−0.703) (0.395) (−0.535) (−1.372) (−0.956)
Leverage 0.015 0.006 0.008 −0.016 −0.038 −0.021 −0.015 −0.046 −0.002
(1.461) (0.177) (0.774) (−1.211) (−0.913) (−1.566) (−0.649) (−0.860) (−0.075)
Cash −0.004 0.006 −0.011 −0.037** −0.036 −0.037** −0.047* −0.022 −0.058*
(−0.358) (0.153) (−0.870) (−2.204) (−0.822) (−2.131) (−1.671) (−0.376) (−1.767)
ROA 0.058** 0.246** 0.035 0.081*** 0.189*** 0.044* 0.040 0.097 −0.007
(2.533) (2.280) (1.606) (3.119) (2.665) (1.768) (1.153) (1.409) (−0.193)
CAPX −0.001 −0.138 −0.014 −0.025 −0.208 −0.025 0.011 −0.432 0.004
(−0.039) (−0.871) (−0.419) (−0.606) (−1.055) (−0.496) (0.126) (−1.387) (0.039)
Tender −0.003 0.003 −0.104* −0.005 −0.008 −0.081 −0.007 −0.006 −0.099*
(−0.339) (0.242) (−1.657) (−0.477) (−0.631) (−1.640) (−0.577) (−0.339) (−1.871)
Diversifying −0.006* −0.006 −0.006 −0.009** −0.019* −0.007 −0.002 −0.012 0.000
(−1.714) (−0.617) (−1.611) (−2.175) (−1.879) (−1.596) (−0.339) (−0.923) (0.016)
Friend −0.024* −0.022 −0.007 −0.019 −0.026 −0.007 −0.008 0.001 0.010
(−1.848) (−0.729) (−0.479) (−1.408) (−1.008) (−0.391) (−0.410) (0.031) (0.383)
Number of −0.021* −0.005 −0.015 −0.018 0.005 −0.027 −0.013 0.006 −0.082***
bidders (−1.728) (−0.298) (−0.734) (−1.561) (0.281) (−1.351) (−0.904) (0.364) (−2.675)
Relative size −0.010 −0.069** 0.085** −0.012 −0.080*** 0.087** −0.017 −0.072** 0.106**
(−0.522) (−2.598) (2.433) (−0.589) (−3.314) (2.476) (−0.736) (−2.271) (2.178)
Cash deal 0.002 −0.010 0.001 0.002 −0.009 0.001 0.001 −0.010 0.006
(0.483) (−0.872) (0.288) (0.564) (−0.740) (0.317) (0.139) (−0.636) (0.924)
Stock deal −0.019 −0.050*** −0.008 −0.022* −0.051*** −0.017 −0.020 −0.072*** −0.021
(−1.405) (−2.950) (−0.487) (−1.653) (−3.473) (−1.055) (−1.044) (−3.809) (−0.886)
Initial bidder −0.003 −0.006 0.000 −0.000 −0.009 0.002 0.006 0.019 0.004
(−0.527) (−0.214) (0.046) (−0.086) (−0.331) (0.386) (0.544) (0.740) (0.316)
Frequent acquirer 0.000 −0.009 0.003 −0.003 −0.016 −0.001 −0.022** −0.017 −0.024*
(0.074) (−0.628) (0.616) (−0.691) (−1.095) (−0.183) (−2.100) (−0.742) (−1.963)
Serial acquirer −0.004 0.010 −0.003 −0.004 0.018 −0.004 −0.006 −0.011 −0.003
(−0.537) (0.481) (−0.414) (−0.569) (0.923) (−0.591) (−0.888) (−0.480) (−0.351)
Industry-year FE Yes Yes Yes Yes Yes Yes Yes Yes Yes
N 2058 601 1457 2058 601 1457 2058 601 1457
Adjusted R2 0.081 0.336 0.063 0.220 0.557 0.236 0.248 0.518 0.283
This table reports results of OLS regressions of bidder's announcement returns on education state. The sample of acquisitions includes 2058
completed cross-state U.S. mergers and acquisitions between 2000 and 2015 as described in Table 1. CAR(−1,+1), CAR(−2,+2), CAR(−3,3) are
acquirer's three-day, five-day, and seven day cumulative announcement returns. Education state is an indicator variable that equals one if the CEO
has received a degree from state s, and zero otherwise. The remaining variable definitions are in the Appendix. Robust standard errors are clustered
at the firm level and t-statistics are in parentheses. Significance levels are denoted by ⁎, ⁎⁎, ⁎⁎⁎, which correspond to the 10%, 5%, and 1% levels,
respectively.
and relative size of the target (Relative size).

Columns (1), (4) and (7) of Table 10 estimate the effect of education-state acquisitions on the bidder's three-day, five-day, and
seven-day CAR among both public and private targets. After controlling for firm and deal characteristics, the coefficient estimates on
Education state are positive and significant, suggesting that education-state deals on average are value-enhancing investments. This
effect is economically large given that acquirer shareholders tend to earn on average zero returns, and it suggests that acquirer
shareholders value education-state acquisitions. In terms of economic magnitude, education-state acquisitions are associated with a
$41.561 million gain in acquirer's stock-market valuation for a medium-size firm with a market cap of 3197 million in our sample.
We then split the sample into public and private acquisitions, since they are different in nature (Fuller et al., 2002). For the two
subsamples, when we examine the three-day CAR, the coefficient estimates on Education state are both positive (2.2% and 1.5%, for
public and private acquisitions, respectively), though the result is only significant for public deals. When we move to the five-day
CAR, the coefficient estimates on Education state are positive and statistically significant in both subsamples. As we move to the seven-
day CAR, both the economic and statistical significance on Education state for private target subsample continue to go up (4.5% with a
t-statistic of 2.353) and outweigh those of public target deals (2.3% with a t-statistic of 1.867). Overall, that both public and private
acquisitions receive positive CARs surrounding the acquisition announcements suggests that the net effect of information advantage
and familiarity bias is positive for the education-state mergers. While the market reacts positively to education-state private-target
251
acquisitions, the information is priced into the stock price at a slower rate.
6.2. Cross-sectional variation
To provide better identification for the information channel, we next examine whether the effect of education network on merger
outcomes varies cross-sectionally with the size of the state. If CEOs obtain unique information advantages toward targets in their
education state, the effect should be stronger when the distance between the target and the school is shorter. To proxy for information
advantage, we create two variables. The first variable, Large state, is an indicator variable that equals one if the target state's physical
size is above the sample median. We predict that the information advantage should be weaker among large states. We measure a
state's physical size using data from the U.S. Census Bureau.6 The second variable, Distance, is the physical distance between the
target firm's headquarters and the school where the bidder CEO went to. Following Pool et al. (2012), we first convert target
headquarters and school zip codes to latitude and longitude using the census files, and calculate distance using the formula in Pool,
Stoffman, and Yonker's footnote 7. Among education-state acquisitions, the mean and median distance between the target firm's
headquarters and the school where the bidder CEO went to is 207.25 and 147.96 miles, respectively.
We examine the above prediction in Table 11. The dependent variable is the cumulative announcement returns calculated in the
three-day, five-day, and seven-day window. In columns (1) to (3), we examine the announcement returns using the full sample of
acquisitions and include Large state as an additional control variable. The coefficient estimate on Education state continues to be
positive and significant, suggesting that education-state acquisitions have positive announcement returns, even after controlling for
the size of the target state.
We next examine the cross-sectional variation using the full sample of acquisitions in columns (4) to (6) of Table 11. The main
variable of interest is the interaction term between Education state and Large state. We find that the coefficient estimate on the
interaction term is negative and significant, suggesting that while education-state acquisitions are value-enhancing investments, the
effect is weaker when the education state is large. The results are consistent with the prediction that the bidder CEO has less
information advantage when the school location is further away from the target's headquarters.
Finally, in columns (7) to (9) we focus only on education-state acquisitions, and examine the effect that the distance between the
target firm's headquarters and the school that the bidder CEO attended tends to have on the announcement returns. Consistent with
our hypothesis, the coefficient on Distance is negative and statistically significant, suggesting that, among education-state acquisi-
tions, distance decreases the bidder CEO's information advantage. The combined evidence in this section provides additional support
to the information channel and adds evidence that the observed effect is truly due to CEO educational background and social
networks.
6.3. Measures of merger performance
We now turn to merger performance, in order to assess the source of gains from education-state acquisitions. First, we examine
whether the observed effect is due to lower payment (Target premium). One possible economic mechanism driving superior acquirer
performance in education-state acquisitions could be that bidder CEOs have an information advantage about the true value of the
target, and this advantage allows them to acquire the target at a lower price or simply to avoid overpaying for the target. On the other
hand, if familiarity bias is driving the results, education-state deals should have negative announcement returns; CEOs could pay a
higher premium and demonstrate overconfidence in their belief that they can make the deal work (Malmendier and Tate, 2008).
Following Officer (2003), we create Target premium to examine whether CEOs pay a lower premium for education-state acqui-
sitions. Column (1) in Table 12 presents the estimation results. The negative coefficient on Education state suggests that acquirers are
able to pay a lower price for education-state deals. This result is consistent with H2 that CEOs have better information regarding the
target firm and are able to pay lower premiums for education-state deals.
Following Bena and Li (2014), we next use the following measures to evaluate the impact of mergers and acquisitions on the firm's
operating and stock market performance. First, we examine the immediate stock-price reaction of the acquirer and the target firm to
the bid announcement (Combined CAR). Combined CAR is the cumulative abnormal returns for a value-weighted portfolio of the
acquirer and the target calculated over the three-day event window. The weights are based on the market capitalizations of the
acquirer and the target two months prior to the announcement date.
Second, we examine changes in post-merger long-run operating performance (ΔROA) to examine the profitability of education-
state acquisitions. ΔROA is calculated following Healy et al. (1992). For each fiscal year in the three-year period preceding the deal
announcement, we calculate the industry-adjusted ROA of the acquirer and the target by subtracting the median ROA in their
industry based on the two-digit SIC codes. We then construct a portfolio of the acquirer and the target, and calculate the industry-
adjusted ROA of the portfolio for a given fiscal year as the weighted average of acquirer's and target's industry-adjusted ROA, where
the portfolio weights are calculated using the book values of the acquirer and the target at the beginning of that fiscal year. We use
the three-year average of the industry-adjusted ROA as a measure of the pre-merger ROA of the acquirer and the target. We then track
each acquisition for three years after the deal completion year, and calculate the three-year average of the combined firm's industry-
adjusted ROA as our measure of post-merger ROA.
The coefficient estimate on Education state in column (2) of Table 12 suggests that education-state acquisitions are associated with
6
https://www.census.gov/prod/cen2000/phc3-us-pt1.pdf
252
Table 11
Interaction with state size.
All deals Education-state deals
Y. Wang, S. Yin
CAR(−1,+1) CAR(−2,+2) CAR(−3,+3) CAR(−1,+1) CAR(−2,+2) CAR(−3,+3) CAR(−1,+1) CAR(−2,+2) CAR(−3,+3)
(1) (2) (3) (4) (5) (6) (7) (8) (9)
Education state 0.016* 0.023** 0.035** 0.037 0.036** 0.055**

(1.828) (2.005) (2.239) (1.501) (2.035) (2.187)
Large state −0.006* −0.008** −0.013** −0.009** −0.005 −0.008
(−1.770) (−2.258) (−2.418) (−2.344) (−1.470) (−1.613)
Education state x Large state −0.038* −0.031** −0.047*
(−1.833) (−1.974) (−1.819)
Distance −0.002* −0.002** −0.001**
(−1.854) (−2.171) (2.098)
Size −0.008*** −0.007*** −0.004* −0.007*** −0.007*** −0.004* −0.004*** −0.003** 0.002
(−4.442) (−3.452) (−1.919) (−3.453) (−3.945) (−1.950) (−3.367) (−2.162) (0.135)
B/M 0.000 0.001 −0.001 0.003 0.002 −0.001 0.000 0.001 0.071
(0.116) (0.492) (−0.353) (0.737) (0.708) (−0.229) (0.125) (0.470) (0.789)
Leverage −0.006 −0.017 −0.011 −0.022 −0.016 −0.013 −0.004 −0.015 −0.106
(−0.477) (−1.270) (−0.505) (−0.919) (−1.279) (−0.580) (−0.340) (−1.116) (−0.847)
Cash −0.030** −0.039** −0.040 −0.019 −0.032* −0.038 −0.033** −0.043** −0.079
(−2.071) (−2.329) (−1.537) (−0.868) (−1.960) (−1.447) (−2.279) (−2.507) (−0.733)
ROA 0.052** 0.071*** 0.051 0.083** 0.080*** 0.053 0.050** 0.068*** −0.098
(2.210) (2.936) (1.357) (2.293) (3.065) (1.404) (2.167) (2.849) (−0.511)
253
CAPX 0.015 −0.010 0.013 0.098 −0.010 0.014 −0.003 −0.033 1.210*
(0.432) (−0.236) (0.144) (1.402) (−0.240) (0.159) (−0.102) (−0.797) (1.871)
Relative size −0.029 −0.032 −0.020 −0.033 −0.032 −0.020 −0.010 −0.013 0.168
(−1.477) (−1.558) (−0.865) (−1.539) (−1.635) (−0.876) (−0.539) (−0.614) (1.288)
Tender −0.004 −0.007 −0.006 −0.004 −0.008 −0.006 −0.001 −0.004 −0.013
(−0.439) (−0.729) (−0.503) (−0.388) (−0.805) (−0.518) (−0.067) (−0.365) (−0.211)
Diversifying −0.007* −0.010** −0.000 −0.001 −0.009** −0.001 −0.008** −0.010** −0.104**
(−1.866) (−2.349) (−0.057) (−0.238) (−2.266) (−0.189) (−1.964) (−2.411) (−2.424)
Friendly −0.019 −0.013 −0.020 −0.035* −0.018 −0.024 −0.022* −0.018 −0.030
(−1.447) (−1.025) (−0.901) (−1.902) (−1.390) (−1.000) (−1.726) (−1.338) (−0.391)
Number of bidders −0.022 −0.020 −0.011 −0.014 −0.017 −0.012 −0.023* −0.021 −0.000
(−1.614) (−1.523) (−0.818) (−1.071) (−1.476) (−0.910) (−1.674) (−1.560) (−1.216)
Serial −0.003 −0.004 0.005 0.007 −0.002 0.006 −0.003 −0.004 −0.045
(−0.482) (−0.503) (0.507) (0.426) (−0.583) (0.570) (−0.523) (−0.552) (−0.831)
Initial bidder −0.006 −0.004 −0.016 −0.000 0.002 −0.013 −0.004 −0.002 0.222*
(−1.213) (−0.779) (−1.423) (−0.026) (0.349) (−1.222) (−0.887) (−0.410) (1.940)
Frequent acquirer 0.003 −0.001 −0.004 −0.012 −0.000 −0.003 −0.000 −0.004 −0.091*
(0.660) (−0.233) (−0.608) (−0.616) (−0.374) (−0.447) (−0.101) (−0.883) (−1.758)
Cash deal 0.001 0.002 0.001 −0.006 0.002 0.001 0.001 0.002 −0.065*
(0.363) (0.512) (0.252) (−1.059) −0.368 (0.158) (0.371) (0.487) (−1.860)
Stock deal −0.019 −0.022 −0.021 −0.024 −0.022 −0.023 −0.019 −0.022 −0.121
(−1.410) (−1.596) (−1.126) (−1.456) (−1.643) (−1.166) (−1.398) (−1.553) (−1.351)
Industry-year FE Yes Yes Yes Yes Yes Yes Yes Yes Yes
N 2058 2058 2058 2058 2058 2058 216 216 216
(continued on next page)
Table 11 (continued)
All deals Education-state deals

Y. Wang, S. Yin
CAR(−1,+1) CAR(−2,+2) CAR(−3,+3) CAR(−1,+1) CAR(−2,+2) CAR(−3,+3) CAR(−1,+1) CAR(−2,+2) CAR(−3,+3)
(1) (2) (3) (4) (5) (6) (7) (8) (9)
2
Adjusted R 0.209 0.219 0.241 0.300 0.225 0.246 0.568 0.678 0.835
This table reports the results of OLS regressions of the bidder's announcement returns on education state. CAR(−1,+1), CAR(−2,+2), CAR(−3,3) are acquirer's three-day, five-day, and seven day
cumulative announcement returns. Education state is an indicator variable that equals one if the CEO has ever received a degree from state s and zero otherwise. Large state is an indicator variable that
equals one if the target state's physical size is above the sample median and zero otherwise. Distance is the physical distance between the target firm's headquarters and the school that the bidder CEO
attended. Columns (1)–(6) include all acquisitions and columns (7)–(9) include only education-state acquisitions. Definitions for all remaining variables are available in our Appendix. Robust standard
errors are clustered at the firm level, and t-statistics are in parentheses. Significance levels are denoted by *, **, ***, which correspond to the 10%, 5%, and 1% levels, respectively.
254
Table 12
Merger performance.
Target premium Combined CAR ΔROA
(1) (2) (3)
Education state −0.158* 0.036* −0.027

(−1.760) (1.723) (−0.946)
Size 0.012 −0.006 −0.001
(0.425) (−1.220) (−0.092)
B/M 0.147 0.060** −0.161*
(1.313) (1.976) (−1.838)
Leverage −0.091 0.119** 0.175**
(−0.487) (2.084) (2.127)
Cash −0.187 −0.009 0.103
(−0.862) (−0.161) (0.931)
ROA −0.309* 0.228* 0.174
(−1.832) (1.942) (0.922)
CAPX −1.342 −0.158 0.329
(−1.228) (−0.898) (0.684)
Tender −0.031 0.018 0.037*
(−1.011) (1.064) (1.827)
Diversifying 0.010 −0.016 0.024
(0.132) (−1.272) (1.035)
Friendly 0.081 −0.084** −0.078*
(1.204) (−2.397) (−1.869)
Number of bidders −0.123 −0.019 0.048
(−1.246) (−0.903) (1.054)
Relative size 0.006 −0.061** −0.025
(0.104) (−2.370) (−0.655)
Cash deal 0.062 −0.020 −0.007
(0.728) (−1.321) (−0.403)
Stock deal −0.162** −0.049* 0.050
(−2.222) (−1.883) (0.789)
Initial bidder −0.285*** 0.072* 0.020
(−2.702) (1.670) (0.641)
Frequent acquirer 0.022 0.003 0.034
(0.145) (0.207) (1.332)
Serial acquirer 0.028 0.046 0.012
(0.290) (1.469) (0.349)
N 601 601 601
Adjusted R2 0.405 0.196 0.074
This table reports results of OLS regressions of acquisition performance on education state. The sample of acquisitions includes 2058
completed cross-state U.S. mergers and acquisitions between 2000 and 2015 as described in Table 1. Education state is an indicator variable
that equals one if the CEO has received a degree from state s, and zero otherwise. The remaining variable definitions are in the Appendix.
Robust standard errors are clustered at the firm level and t-statistics are in parentheses. Significance levels are denoted by ⁎, ⁎⁎, ⁎⁎⁎, which
correspond to the 10%, 5%, and 1% levels, respectively.
higher combined market reactions. The estimation results from column (3) of Table 12 suggest that the results do not come from
changes in long-term performance due to better synergy. Overall, the evidence from this table suggests that CEOs are able to extract
private information from education-state deals and pay a lower premium. While the effect is not significant for changes in long-term
operating performance, the combined market reaction for education-state acquisitions is positive and significant, suggesting that
education-state acquisitions are value-enhancing investments.
6.4. Corporate governance and the education-state effect
To provide more evidence on the efficiency of education-state mergers, we examine whether the observed effect varies cross-
sectionally with corporate governance. If familiarity bias is driving our results and CEOs conduct these mergers for private benefit,
the effects should be more pronounced in firms with weak corporate governance. On the other hand, the information channel would
predict a positive or no relation between governance and the frequency of education-state mergers. The intuition for the positive
relation is that well-governed firms are more likely to utilize a CEO's education-state information advantage, while the intuition for
the no relation is that if education-state mergers are value enhancing, CEOs will maximize their information advantage, thus cor-
porate governance should not affect a CEO's willingness to conduct education-state mergers. We use four proxies for corporate
governance: G-index, E-index, board independence, and CEO duality.
G-index is the Gompers et al. (2003) governance index constructed using 24 anti-takeover provisions. Firms with a lower G-index
are considered as firms with stronger shareholder rights and better corporate governance. E-index is the Bebchuk et al. (2008)
255
Table 13
Corporate governance.
N attempts
(1) (2) (3) (4)
Education state 0.002 0.022** 0.005 0.017**

(0.095) (2.224) (0.401) (2.389)
G-Index 0.001
(0.766)
Education state * G-index 0.001
(0.830)
E-Index 0.001
(1.415)
Education state * E-index −0.005*
(−1.816)
Board independence −0.001
(−0.440)
Education state * Board independence 0.005
(0.352)
CEO duality 0.001
(0.743)
Education state * CEO duality −0.016*
(−1.849)
Size 0.009*** 0.005*** 0.006*** 0.004***
(3.950) (5.253) (5.742) (5.024)
B/M −0.000 −0.000* −0.004*** −0.000*
(−1.519) (−1.676) (−4.392) (−1.708)
Leverage −0.000 −0.004 −0.004 −0.005**
(−0.058) (−1.317) (−1.322) (−1.969)
Cash −0.014* −0.009** −0.011*** −0.010***
(−1.687) (−2.549) (−3.057) (−2.876)
ROA 0.010** 0.004 0.003 0.005***
(2.084) (1.575) (1.337) (2.642)
CAPX −0.004 0.007 0.004 0.006
(−0.288) (0.972) (0.550) (0.903)
CEO age −0.000 0.000 0.000 0.000
(−0.537) (0.777) (0.558) (0.806)
CEO tenure 0.000 −0.000 −0.000 −0.000
(0.008) (−1.590) (−1.229) (−1.155)
Male CEO −0.002 −0.002 −0.003 −0.003
(−0.228) (−0.614) (−0.735) (−1.313)
Delta −0.000*** −0.000 −0.000 −0.000
(−3.765) (−0.914) (−1.189) (−1.011)
Vega 0.000 0.000** 0.000*** 0.000**
(0.404) (2.052) (3.211) (2.124)
CEO overconfidence 0.003 0.002 0.001 0.001
(1.052) (1.567) (0.886) (0.897)
Industry-year FE Yes Yes Yes Yes
Firm-state FE Yes Yes Yes Yes
Firm FE Yes Yes Yes Yes
N 147,331 493,430 475,570 629,824
Adjusted R2 0.172 0.145 0.146 0.124
This table reports results on the impact of corporate governance on the acquisition decision in CEOs' education state. Columns (1) to (4) report
coefficient estimates using the cross-state target sample. The dependent variable is the number of M&A attempts made by the acquiring firm i in state
s during year t. Education state is an indicator variable that equals one if the CEO has received a degree from state s, and zero otherwise. G-index is the
Gompers et al. (2003) governance index constructed using 24 anti-takeover provisions. E-index is the Bebchuk et al. (2008) entrenchment index
constructed from six provisions. Board independence is a dummy variable that equals one if the majority of the board are independent directors, and
zero otherwise. CEO duality is an indicator variable that equals one for firms in which the same individual holds both the CEO and Chair positions,
and zero otherwise. The remaining variable definitions are in the Appendix. Robust standard errors are clustered at the firm level and t-statistics are
in parentheses. Significance levels are denoted by ⁎, ⁎⁎, ⁎⁎⁎, which correspond to the 10%, 5%, and 1% levels, respectively.
entrenchment index constructed using six provisions. Firms with a higher E-index have worse corporate governance. Board in-
dependence is the percentage of the board of directors that are independent. Boards that are more independent are more likely to act in
the interest of shareholders. Finally, CEO duality is an indicator variable that equals one if the CEO is also the chairman. CEO duality
is negatively related to corporate governance. We interact Education state with each one of the governance proxies. If the observed
relation between a firm's M&A activities and their CEO's education state is driven by familiarity bias, we expect to see that the effect is
stronger when the CEO is the chairman, and among firms with a higher G-index, a higher E-index, a less independent board.
Table 13 reports the cross-sectional results. In column (1), the coefficient estimate on the interaction term between Education state
256
and G-index is statistically indistinguishable from zero, suggesting that the likelihood of making an education-state acquisition does
not vary with corporate governance as measured using G-index. In column (2), the coefficient on the interaction between Education
state and E-index is significantly negative, suggesting that CEOs from well-governed firms are more likely to make an acquisition in
the CEO's education state. It is likely that good governance firms are taking advantage of CEO's information advantage in her
education state.
We interact Education state with Board independence in column (3). The coefficient estimate on the interaction term is again
statistically insignificant, suggesting that CEOs from worse governance firms are no more likely to make merger and acquisition
decisions in their CEO's education state. Finally, in column (4), the coefficient estimate on the interaction term between Education
state and CEO duality is significantly negative, suggesting that the likelihood of making an education-state acquisition is lower in firms
in which the same individual holds both the CEO and chairman position.
Overall, the cross-sectional evidence in this section indicates that the observed positive relation between CEO education back-
ground and acquisition is unlikely to be driven by familiarity bias, as firms with better governance are actually more likely to engage
in these education-state acquisitions. This evidence, combined with the evidence above that the market reacts positively to education-
state acquisitions, suggests that the observed behavior of education-state merger may be due to information advantage.
7. Conclusion
Using two very different regression methodologies that model acquisition-target selection, this paper documents that CEOs are
more likely to acquire targets headquartered in states where they earned at least a bachelor's degree. These education-state acqui-
sitions are larger and have a higher completion rate compared to non-education-state acquisitions.
The observed relation could be due to CEOs' unique information advantage toward target firms in the education state or due to
CEOs' familiarity bias toward firms in the education state. To distinguish between the two channels, we focus on the bidder's cu-
mulative abnormal returns around the deal announcement and other measures of merger performance such as the target premium
and the combined market reaction for bidder and target. We find that the stock market reacts positively to education-state acqui-
sitions, bidders pay a lower target premium for education-state acquisitions, and the combined market reaction is positive. Taken
together, the empirical evidence suggests that education-state acquisitions are more likely to be driven by the bidder CEO's in-
formation advantage through school networks and education-state acquisitions are value-enhancing investments.
Appendix A. Variable definitions
Variables Definitions Source
Firm characteristics:
Size Natural log of total book asset. Compustat
B/M Total Assets/ (Total Assets - Book Equity + Market Value of Equity). Compustat
Leverage Sum of long-term debt and debt in current liabilities over book value of total assets. Compustat
ROA Operating income before depreciation (EBITDA) over book value of total assets. Compustat
Cash Cash and cash equivalent holdings over book value of total assets. Compustat
CAPX Capital expenditure over book value of total assets. Compustat
Board An indicator variable that equals one if the majority of the board are independent directors, and ISS
indepen- zero otherwise.
dence
G-index The Gompers et al. (2003) governance index constructed using 24 anti-takeover provisions. ISS
E-index The Bebchuk et al. (2008) entrenchment index constructed from six provisions. ISS
CEO duality An indicator variable that equals one for firms in which the same individual holds both the CEO Execucomp
and Chair positions, and zero otherwise.
CEO characteristics
Tenure CEO tenure.
CEO age CEO age. Execucomp
Delta The change in the dollar value of the CEO's wealth for a one percentage point change in stock Execucomp
price.
Vega The change in the dollar value of the CEO's wealth for a 0.01 change in the annualized standard Execucomp
deviation of stock returns.
Male An indicator variable that equals one if the CEO is male, and zero otherwise. Execucomp
Overconfidence An indicator variable that equals one if the CEO is overconfident defined by Campbell et al. Execucomp
(2011), and zero otherwise.
Short tenure An indicator variable that equals one if CEO tenure is less than three years, and zero otherwise. Execucomp
Deal characteristics
257
Education state An indicator variable that equals one if the target is headquartered in the acquiring CEO's BoardEx
education state, and zero otherwise.
N attempts The number of M&A attempts made by the acquiring firm i in state s during year t. SDC
N complete The number of M&A attempts completed by the acquiring firm i in state s during year t. SDC
DV/TV The total transaction value of firm i's acquisitions in state s scaled by the total transaction value SDC
made by firm i during year t.
Bidder CAR Three-day cumulative abnormal returns calculated using the market model. CRSP
(−1,+1)
Bidder CAR Five-day cumulative abnormal returns calculated using the market model. CRSP
(−2,+2)
Bidder CAR Seven-day cumulative abnormal returns calculated using the market model. CRSP
(−3,+3)
Relative Size The ratio of the target's book value of total assets over the acquirer's book value of total assets. SDC &
Compustat
Tender An indicator variable that equals one if the deal is a tender offer, and zero otherwise. SDC
Stock deal An indicator variable that equals one if the acquisition is financed entirely with bidder stocks, and SDC
zero otherwise.
Cash deal An indicator variable that equals one if the acquisition is financed entirely with cash, and zero SDC
otherwise.
Friend An indicator variable that equals one if the deal's attitude is labeled as “Friendly” in SDC, and zero SDC
otherwise.
Diversifying An indicator variable that equals one if the target and acquirer are in different 2-digit SIC SDC
deal industries, and zero otherwise.
Initial industry An indicator variable that equals one if the firm is the first firm in a four-digit CRSP SIC code to SDC
bidder make a bid after a minimum dormant period (a period without bids by other firms in the industry)
of twelve months, and zero otherwise.
Frequent An indicator variable that equals one if the acquirer completes bids for five or more targets in any SDC
acquirer three-year window during the sample period, and zero otherwise.
Serial acquirer An indicator variable that equals one if the acquirer involved in five or more deals over the sample SDC
period, and zero otherwise.
Large state An indicator variable that equals one if the target state's physical size if above the sample median. U.S. Census
Bureau
Distance Following Pool et al. (2012), Distance is the physical distance between the target firm's U.S. Census
headquarters and the school that the bidder CEO attended. Bureau
Target We first calculate Premium1, which equals the ratio of total value offered to target shareholders to SDC &
premium the total value of target's market value of equity 2 months prior to the announcement, minus one. CRSP
If Premium1 is not between 0 and 2, we create Premium2, which equals the ratio of initial offer
price to target's share price 2 months prior to the announcement, minus one. If Premium2 is not
between 0 and 2, we set premium to missing.
Combined CAR The market-value-weighted average of the target's and acquirer's three-day cumulative abnormal CRSP
returns, with the market value measured the year before the announcement.
ΔROA The change in industry-adjusted ROA from one year before the deal announcement to three years Compustat
after the deal completion.
This figure presents the bidder's three-day, five-day, and seven-day cumulative abnormal returns around the announcement of
education-state deals and other deals. The sample consists of 2058 completed U.S. mergers and acquisitions from 2000 to 2015.
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Journal of Corporate Finance 52 (2018) 238–259

Contents lists available at ScienceDirect

Journal of Corporate Finance

CEO educational background and acquisition targets selection☆

2. Possible eﬀects of educational background on M&A outcomes and related literature

rest of the study.

2.1. Literature on familiarity bias

2.2. Information channel

2.3. Familiarity bias channel

2.4. Empirical prediction

Section 6 provides a more detailed discussion of each test.

3. Data and sample construction

4. CEOs education-state mergers and acquisitions

4.1. Baseline results

4.2. Public vs. private targets acquisitions

(1) (2) (3)

Education state 0.014** 0.005*** 0.003***

4.3. Alternative methods

N attempts N complete DV/TV N attempts N complete DV/TV

(1) (2) (3) (4) (5) (6)

Education stat 0.002*** 0.001* 0.002*** 0.011** 0.003** 0.002**

5. Endogeneity and reverse causality

N attempts N complete N attempts N complete

(1) (2) (3) (4)

Education state 0.694*** 0.800*** 0.361** 0.393**

5.1. CEO turnover

(1) (2) (3)

Prior CEO's education state 0.003 0.002 0.001

5.2. R-squared movements

(1) (2) (3)

Coeﬃcient 0.014⁎⁎ 0.005⁎⁎⁎ 0.003⁎⁎⁎

5.3. Reverse causality: CEO tenure

5.4. Placebo test

(1) (2) (3)

Education state 0.023** 0.005* 0.002*

(1) (2) (3)

Education state −0.00002 −0.00003 −0.00001

(1) (2) (3)

Education state 0.008*** 0.003*** 0.022***

6. Information vs. familiarity bias channel

6.1. Market reaction to education-state acquisitions

Fig. 1. Bidders cumulative abnormal returns.

positively for education-state private deals.

CARi, j, t = δj, t + βe Education statei, t + Deal Controli, t + Firm Controlsi, t − 1 + ϵi, j, t

(1) (2) (3) (4) (5) (6) (7) (8) (9)

and relative size of the target (Relative size).

6.2. Cross-sectional variation

6.3. Measures of merger performance

CAR(−1,+1) CAR(−2,+2) CAR(−3,+3) CAR(−1,+1) CAR(−2,+2) CAR(−3,+3) CAR(−1,+1) CAR(−2,+2) CAR(−3,+3)

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Education state 0.016* 0.023** 0.035** 0.037 0.036** 0.055**

All deals Education-state deals

CAR(−1,+1) CAR(−2,+2) CAR(−3,+3) CAR(−1,+1) CAR(−2,+2) CAR(−3,+3) CAR(−1,+1) CAR(−2,+2) CAR(−3,+3)

(1) (2) (3) (4) (5) (6) (7) (8) (9)

(1) (2) (3)

Education state −0.158* 0.036* −0.027

6.4. Corporate governance and the education-state eﬀect

(1) (2) (3) (4)

Education state 0.002 0.022** 0.005 0.017**

Appendix A. Variable deﬁnitions

Variables Deﬁnitions Source

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Education state 0.014 0.005* 0.003***

Education stat 0.002*** 0.001* 0.002* 0.011 0.003 0.002

Education state 0.694* 0.800* 0.361 0.393

Education state 0.008* 0.003* 0.022***

Education state 0.016* 0.023 0.035 0.037 0.036 0.055

Education state 0.002 0.022 0.005 0.017