Formal Versus Informal Institutions and the Competitive Impact of Mergers and Acquisitions

While prior studies considered firm- and industry-level factors when considering the competitive impact of mergers and acquisitions on rivals, institutional factors remain underexplored. Our study attempts to reconcile how differences in the degree of development of the institutional environments where acquiring, target, and rival firms operate shape rivals’ expected performance to the M&A announcements of their competitors. We show that formal and informal institutions have opposite effects: while large differences in informal institutions between the acquirer and the target make a M&A more difficult to implement and thus positively impact rivals, the opposite happens for differences in formal institutions. In addition, rivals’ own institutional environments affect their ability to handle the competitive threats from the M&As of competitors and therefore mitigate the main effects.