We explore factors affecting the long-term performance of cross-border M&A, with a special focus on cultural distance between the countries of the two firms. Using a sample of over 400 cross-border acquisitions in the period 1991-2000, we find that contrary to general perception, cross-border acquisitions perform better in the long-run i f the acquirer and the target come from countries that are culturally more disparate. We use the Hofstede measure of cultural dimensions to define cultural

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... ance and also examine alternative measures such as language, religion and legal origin to capture cultural differences. The positive effect of cultural distance persists after controlling for several deal-specific variables and country-level fixed effects, and is robust to alternative specifications and horizons of long-term performance. Divergence (convergence) in degree of individualism and hierarchy in power structures (attitudes towards uncertainty) beneficially impacts post-acquisition performance. Among deal characteristics, cash and friendly acquisitions tend to perform better in the long-run. There is also some evidence of synergies when acquirers from stronger corporate governance regimes acquire targets from weaker regimes. "In Russia, 3M is showing how companies can turn cultural variations into business advantages." Harvard Business Review 6 like deal and country-level characteristics. We use the Hofstede metric of cultural distance to determine cultural difference between the countries involved in the acquisition. We find that the Hofstede cultural distance is statistically and economically significant in explaining long-term stock market performance of the acquirer, as measured by the 36-month Buy-and-Hold Abnormal Return (BHAR). Moreover, the cultural distance between acquirer and target nations has a positive effect on subsequent performance of acquiring firms. A one standard deviation (≈23.8) increase in Hofstede distance increases the acquirer's 36-month BHAR by 30.9%. The magnitude of economic significance of the Hofstede measure is best explained by a hypothetical example , since absolute values of the Hofstede metric are not intuitive. For example, the cultural distance between United States and Greece is approximately 8 8.98, and the distance between United States and Sweden is approximately 63.4. So, for a U.S. acquirer, Greece is 25.58 unit distance more culturally disparate than Sweden. According to our empirical findings, ceteris paribus, this should cause a 33.25% outperformance of the U.S. acquirer's BHAR in case of a Greek target acquisition relative to a Swedish target acquisition. Further, we examine the effect of divergence between acquirer and target country cultures along different dimensions of cultural distance on acquirer three-year BHAR. We find that acquirers from countries with more rigid power structures do better when they acquire targets from countries with less rigid power structures, potentially by impacting the post-acquisition integration process. Acquirers that come from more individualistic societies benefit from higher synergies when the target is from a collectivistic society. This is indicative of potential complementarities in organizational functions between the acquirer and target. On the other hand, the divergence in uncertainty avoidance attitudes has a negative effect on long-run performance. Similar attitudes towards uncertainty and unstructured situations may facilitate higher levels of understanding and coordination during the integration process. Observing the effects of different dimensions of cultural disparity lends support to the possibility that these differences are not 7 See for example, Morosini, Shane and Singh (1998), Datta and Puia (1995) . 4 necessarily incompatible , as would be predicted by a more simplistic view. Since Hofstede distance captures the divergence along several cultural dimensions, including the ones mentioned above, it is our primary measure of cultural disparity. Our results seem surprising in the face of entrenched conventional wisdom about cultural differences being detrimental to post-acquisition performance of acquiring firms. Instead of corroborating these familiar (and simplistic ) ideas, our empirical evidence points to a more complex and multi-dimensional impact of cultural disparity on business activities. For example, some of our results allude to benefits of cultural differences along certain dimensions, like individualism, that can impact the business interactions between target and acquiring firm. We propose certain hypotheses that can lead to our findings on the beneficial effects of cultural disparity but have been largely overlooked so far, and contribute by drawing attention to the substantially more complex role of culture in M&A than generally believed. Cultural distance can be positively related to the long-term performance of M&A due to (i) post-deal cultural synergies that improve performance via diversity in organizational strengths of firms, (ii) pre-deal awareness of cultural differences and its potential difficulties leading to selection bias, where deals involving high cultural disparity materialize only when they have substantial economic potential. These alternative, but not mutually exclusive, hypotheses that propose different mechanisms by which culture plays a role in the performance of deals cannot be distinguished from each other in our empirical tests. However, both hypotheses support the main premise of our study. Both explanations support our original premise that cultural differences impact the post-acquisition performance of acquiring firms, albeit via different mechanisms.