Firm-Level Political Uncertainty 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 uncertainty. This study sheds light on this issue by examining whether and how acquirers’ political risk affects the outcomes of their mergers and acquisitions (M&A) based on a sample of U.S. firms. We show that firm-level political risk lowers acquirers’ M&A activities and this could be explained by acquirers’ financial constraints and the costs of delaying the M&A investment. Consistent with the notion that firms conduct M&A to hedge their risks, our results show that high political risk firms are more likely to conduct vertical M&A and to acquire target firms with lower risks. Our additional analyses show that such deals take more time to complete, are more likely to include termination fees, exhibit higher bid premiums, and are more likely to be paid by shares. Finally, we find that investors react negatively to M&A deals initiated by high political risk firms and these deals have poor long-term stock market performance, suggesting the adverse implications of political risk for M&A deals.