TY - JOUR
T1 - Dance with wolves
T2 - firm-level political risk and mergers and acquisitions
AU - Chen, Xin
AU - Shi, Haina
AU - Zhou, Gaoguang
AU - Zhu, Xindong
N1 - We thank the helpful comments from the audience of Hawaii Accounting Research Conference (2022). We are grateful for the constructive comments from the editor and two anonymous referees. Haina Shi acknowledges financial support from the National Natural Science Foundation of China (Grant No. 72372028) and from Sci-Tech Innovation Foundation of School of Management, Fudan University. Xin Chen acknowledges financial support from the Fundamental Research Funds for the Central Universities (No. 63232168). All errors are our own.
Publisher Copyright:
© The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature 2024.
PY - 2024/8
Y1 - 2024/8
N2 - While previous studies primarily use economy-wide indicators for political risk, Hassan et al. (Quart J Econ 134(4):2135–2202, 2019) propose that a significant portion of political risk manifests itself at the individual firm level. We use their measure of political risk to examine 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. We find that firms exposed to a high level of perceived political risk are less likely to conduct M&As. Furthermore, the negative association between firm-level political risk and M&As is more pronounced when acquiring firms lack either financial capacities or non-financial political/social capacities. More importantly, while firms with high political risk generally delay M&As, we find evidence suggesting that acquiring firms may hedge against their firm-level political risk by strategically choosing low-risk M&A targets and conducting vertical integration. Finally, we show that effectively hedged deals exhibit superior post-M&A performance in terms of higher announcement return, lower likelihood of subsequent divestiture and higher post-acquisition change in financial performance.
AB - While previous studies primarily use economy-wide indicators for political risk, Hassan et al. (Quart J Econ 134(4):2135–2202, 2019) propose that a significant portion of political risk manifests itself at the individual firm level. We use their measure of political risk to examine 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. We find that firms exposed to a high level of perceived political risk are less likely to conduct M&As. Furthermore, the negative association between firm-level political risk and M&As is more pronounced when acquiring firms lack either financial capacities or non-financial political/social capacities. More importantly, while firms with high political risk generally delay M&As, we find evidence suggesting that acquiring firms may hedge against their firm-level political risk by strategically choosing low-risk M&A targets and conducting vertical integration. Finally, we show that effectively hedged deals exhibit superior post-M&A performance in terms of higher announcement return, lower likelihood of subsequent divestiture and higher post-acquisition change in financial performance.
KW - Mergers and acquisitions
KW - Political risk
KW - Risk management
UR - http://www.scopus.com/inward/record.url?scp=85193021542&partnerID=8YFLogxK
UR - https://www.webofscience.com/api/gateway?GWVersion=2&SrcApp=hkbuirimsintegration2023&SrcAuth=WosAPI&KeyUT=WOS:001222361400001&DestLinkType=FullRecord&DestApp=WOS_CPL
U2 - 10.1007/s11156-024-01274-4
DO - 10.1007/s11156-024-01274-4
M3 - Journal article
SN - 0924-865X
VL - 63
SP - 715
EP - 752
JO - Review of Quantitative Finance and Accounting
JF - Review of Quantitative Finance and Accounting
IS - 2
ER -