We study how the cultural distance between two firms affects the likelihood of an acquisition between them. Extant literature has studied the effects of cultural distance mainly in the post-acquisition phase. However, it may play a crucial role also prior to an acquisition, by creating information asymmetries for acquirers. To overcome these difficulties, an acquirer can resort to signals. However, it is not clear to what extent signals work in the context of acquisitions involving cultural distance. We use information economics to investigate if the affiliation with venture capitalists (VCs), as highly selective intermediaries, as well as their reputation serve as quality signals of the target. Using the duration of affiliation with startups, we disentangle the signaling effect of VCs from their potential substantive effect.
