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

Author

Listed:
  • Xin Chen

    (Southwest Jiaotong University)

  • Haina Shi

    (Fudan University)

  • Gaoguang Zhou

    (Hong Kong Baptist University)

  • Xindong Zhu

    (City University of Hong Kong)

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.

Suggested Citation

  • Xin Chen & Haina Shi & Gaoguang Zhou & Xindong Zhu, 2024. "Dance with wolves: firm-level political risk and mergers and acquisitions," Review of Quantitative Finance and Accounting, Springer, vol. 63(2), pages 715-752, August.
  • Handle: RePEc:kap:rqfnac:v:63:y:2024:i:2:d:10.1007_s11156-024-01274-4
    DOI: 10.1007/s11156-024-01274-4
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    More about this item

    Keywords

    Political risk; Mergers and acquisitions; Risk management;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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