Dancing with the Enemy? Relational Hazards and the Contingent Value of Repeat Exchanges in M&A Markets

Abstract

I examine the problem of relational hazards between repeat exchange partners and the contingent roles of trade uncertainty and future exchange prospects in moderating the potentially conflicting effects of past exchanges on these hazards, thereby facilitating or restraining the formation of relational embeddedness. On the data of advisory relationships in U.S. mergers and acquisitions from 1981 to 2004, I find that firms that repeatedly hire the same investment banks as financial advisors tend to overpay for acquisition targets, as reflected by negative investor reactions measured in the cumulative abnormal return. In addition, the degree of overpayment increases with the frequency of prior exchanges. This adverse effect of exchange history grows if the uncertainty regarding the target firm is greater. However, better prospects for future business with acquiring firms help mitigate this negative effect, though this moderating effect varies across the types of exchange experience. The findings suggest that a potentially complex, and nuanced, process underlies repeat exchanges, which are an oft-claimed precursor of relational embeddedness, to deliver tangible economic benefits. This study contributes to the emerging literature on the “dark side” of embeddedness and, more broadly, to the sociology of markets and organizations by substantiating the contingency mechanisms that shape the value of a repeat relationship in market exchanges.

Keywords: relational embeddedness, opportunism hazard, repeat exchange, trade uncertainty, shadow of the future, contingency mechanism, mergers and acquisitions