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

Xin Chen (), Haina Shi (), Gaoguang Zhou () and Xindong Zhu ()
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Xin Chen: Southwest Jiaotong University
Haina Shi: Fudan University
Gaoguang Zhou: Hong Kong Baptist University
Xindong Zhu: City University of Hong Kong

Review of Quantitative Finance and Accounting, 2024, vol. 63, issue 2, No 10, 715-752

Abstract: 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.

Keywords: Political risk; Mergers and acquisitions; Risk management (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11156-024-01274-4

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