Dance with wolves: firm-level political risk and mergers and acquisitions

Xin Chen*, Haina Shi, Gaoguang Zhou, Xindong Zhu

*Corresponding author for this work

Research output: Contribution to journalJournal articlepeer-review

Abstract

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.
Original languageEnglish
Pages (from-to)715–752
Number of pages38
JournalReview of Quantitative Finance and Accounting
Volume63
Issue number2
Early online date14 May 2024
DOIs
Publication statusPublished - Aug 2024

Scopus Subject Areas

  • Accounting
  • General Business,Management and Accounting
  • Finance

User-Defined Keywords

  • Mergers and acquisitions
  • Political risk
  • Risk management

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