US companies are strangely drawn to making acquisitions in the state where their CEO was born

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Who would have guessed CEOs were so homesick?

New research shows that when companies make acquisitions, they disproportionately target businesses in the state where the CEO grew up. While the bosses might argue their knowledge of their home state gives them an edge, those deals tend to be viewed negatively by the markets.

Mergers where one company bought another in a different state that was the home of the CEO occurred 4% of the time, about one third more often that would be expected by chance, according to a working paper from a team of Emory business professors who examined data on 15,526 mergers from 1985 through 2014.

While mergers with no home-state CEO bias were viewed as slightly positive on average by the markets after the announcement—with a .09% bump in stock of the acquiring company, controlling for firm and deal characteristics—when the CEO was from the state of the target company, shares declined 1.67%. In other words, the markets knew these were bad deals.

In another analysis, the farther the target was from the acquiring company—and if it was the CEO’s home town—the worse the market viewed the deal. The effect was particularly pronounced for companies with weak corporate governance or entrenched CEOs (the study’s authors used the “entrenchment index” pioneered by Harvard’s Lucian Bebchuk). The authors note:

We observe that highly entrenched bidder CEOs, or CEOs at firms with poor external monitoring, who participate in faraway mergers that happen to be near their CEO birth city underperform significantly, while the evidence is considerably weaker for home bias mergers instigated by CEOs at better governed firms.

The paper adds to the growing stack of evidence that the people running businesses often make decisions that don’t make economic sense. CEOs and others in business like to think of themselves as making rational decisions to maximize returns, but they’re as vulnerable to unconscious biases as anyone else. A similar study showed mutual fund managers tend to invest in companies from their home states.

The Emory authors give the example of Hillenbrand, a coffin manufacturer in Indiana. After considering 400 possible acquisition targets, it decided in 2010 to buy K-Tron, a Pittman, New Jersey, company that makes factory equipment. As a result of the deal, shares of the Indiana company had a bigger decline than would normally be expected. And while a spokesperson for Hillenbrand says K-Tron’s location was “merely coincidental,” it just so happened that Hillenbrand’s CEO was raised in Pittman, and that’s where his mother still lived.