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The impact of policy uncertainty on the M&A exit of startup firms

Author

Listed:
  • Carmen Cotei

    (University of Hartford)

  • Joseph Farhat

    (Central Connecticut State University)

  • Indu Khurana

    (Hampden-Sydney College)

Abstract

This paper examines how economic policy uncertainty impacts the likelihood of mergers and acquisitions as an exit route for startups. Our results show that an increase in policy uncertainty reduces the likelihood of mergers and acquisitions in startups. We argue that EPU negatively impacts the likelihood of M&A activity by increasing both the risk premium for the target firms and the cost of developing the absorptive capacity for the acquirer firm. However, startups that can build competitive advantage and can demonstrate innovative capabilities through the presence of intellectual property are more likely to exit via merger and acquisition, even in high policy uncertainty. Our results are robust after controlling for macro-level indicators and other model specifications. The study contributes to the growing literature that examines the impact of policy uncertainty on various aspects related to businesses in general and startups in particular.

Suggested Citation

  • Carmen Cotei & Joseph Farhat & Indu Khurana, 2022. "The impact of policy uncertainty on the M&A exit of startup firms," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(1), pages 99-120, January.
    • Handle: RePEc:spr:jecfin:v:46:y:2022:i:1:d:10.1007_s12197-021-09553-9
    DOI: 10.1007/s12197-021-09553-9
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    Cited by:

    1. Khanindra Ch. Das, 2023. "What Affects Startup Acquisition in Emerging Economy? Evidence from India," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 22(2), pages 111-134, June.

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