Does policy uncertainty increase relational risks? Evidence from strategic alliances

Mufaddal Baxamusa, Sudip Datta and Anand Jha

Financial Management, 2021, vol. 50, issue 3, 645-689

Abstract: Prior studies on capital investments, including mergers and acquisitions, point to investment irreversibility as the primary factor behind diminished investments during periods of increased policy uncertainty. We show that increased relational risk, due to the potential for counterparty misbehavior or shirking and higher contracting costs, appears to be the primary driver behind the diminished propensity to undertake strategic alliances during enhanced policy uncertainty regimes. Alliances are even less likely during such times when they (a) involve more than two firms, (b) are in industries with greater counterparty risk, and (c) involve partners that require intense contracts.

Date: 2021
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