Strategic alliance research has shown that national cultural similarity between partner firms can reduce transaction costs and positively influence cross-border alliance formation and performance. Yet, social identity research in psychology suggests that cultural similarity can give rise to in-group favoritism, which can lead partner firms sharing similar cultural backgrounds to cooperate with each other to defend their shared identity instead of pursuing economic efficiencies associated with cultural similarity. To investigate in-group favoritism associated with cultural similarity, we examine the influence of cross-regional religious similarity and ethnic similarity in the U.S. on domestic strategic alliance formation and alliance announcement returns. We find that cross-regional religious similarity and ethnic similarity in the U.S. positively affect the volume of interstate alliance activities, but are negatively associated with combined alliance announcement returns of partner firms. These findings suggest that cross-regional religious similarity and ethnic similarity facilitate interstate alliance activities between U.S. states, but investors seem to negatively interpret alliance decisions that can be potentially driven by in-group favoritism.

ABSTRACT We investigate how the mandatory adoption of International Financial Reporting Standards (IFRS) by publicly listed firms in the European Union affects peer private firms. We find that private firms’ capital investment decreases significantly after the IFRS mandate, relative to public firms. Private firms also display decreased investment when benchmarked against firms relatively insulated from the impact of the IFRS mandate, but the magnitude of the effect is smaller in this case. These results are consistent with the hypothesis that mandatory IFRS reporting (combined with other reforms), while increasing public firms’ financing and investment, crowds out funding for private firms. The effect is more pronounced for larger private firms and in industries where public peers have greater external financing needs. Our evidence suggests that financial reporting regulations cause shifts in resource allocation in an economy.