Firm-Level Political Risk and Mergers and Acquisitions

Abstract

While several studies have examined how economy-wide political uncertainty affects firms’ economic activities, little is known about the economic consequences of firm-level political risk. This study sheds light on this issue by examining whether and how acquirers’ firm-level idiosyncratic political risks affect their mergers and acquisitions (M&A) decisions based on a sample of U.S. firms. I find that firms exposed to high political risks are less likely to conduct M&A even after controlling for economy-level political risks. The results are robust after I address possible endogeneity problems by using PSM and instrumental variable approaches. Also, firm-level political risk is positively related to the time it takes to complete M&A deals, inclusion of target termination fee, and motivates acquirers to use stock for payment. One of the potential explanations for the decreased M&A likelihood is the real options theory. In addition, I find that the unwillingness to conduct M&A is more pronounced when acquirers lack either financial abilities (i.e., financial constraints of the acquirer) or non-financial abilities (i.e., acquirers’ public visibility) to hedge the perceived political risks. Further analyses show that firms actively hedge the firm-level political risks by strategically choose the targets in an M&A. And the hedge leads to favorable M&A performance in terms of CAR, subsequent divestiture and post-acquisition change in ROA, supporting the effectiveness of firms hedging efforts.

Date of Award	26 Jul 2022
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Zhihong YI (External Supervisor), Jeong Bon KIM (Supervisor) & Xindong ZHU (Co-supervisor)