Firm-Level Political Risk and Mergers and Acquisitions


Student thesis: Doctoral Thesis

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Award date26 Jul 2022


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.

    Research areas

  • Political Risk, Mergers and Acquisitions, Risk Management