Dance with Wolves: Firm-Level Political Risk and Mergers and Acquisitions

50 Pages Posted: 22 Jan 2023

See all articles by Xin Chen

Xin Chen

Nankai University

Haina Shi

Fudan University - School of Management

Gaoguang Zhou

Hong Kong Baptist University (HKBU) - Department of Accountancy & Law

Xindong (Kevin) ZHU

City University of Hong Kong (CityU) - Department of Accountancy

Abstract

We examine whether and how firm-level perceived idiosyncratic political risk affects their mergers and acquisitions (M&A) decisions. 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 firms lack either financial or nonfinancial capacities. More importantly, acquiring firms actively hedge against their perceived firm-level political risk by strategically choosing low-risk M&A targets and vertical integration. Finally, we show that effectively hedged deals exhibit superior post-M&A performance.

Keywords: political risk, mergers and acquisitions, risk management

Suggested Citation

Chen, Xin and Shi, Haina and Zhou, Gaoguang and ZHU, Xindong (Kevin), Dance with Wolves: Firm-Level Political Risk and Mergers and Acquisitions. Available at SSRN: https://ssrn.com/abstract=4334444 or http://dx.doi.org/10.2139/ssrn.4334444

Xin Chen

Nankai University ( email )

94 Weijin Road
Tianjin, 300071
China

Haina Shi (Contact Author)

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Gaoguang Zhou

Hong Kong Baptist University (HKBU) - Department of Accountancy & Law ( email )

Kowloon Tong, Kowloon
Hong Kong

Xindong (Kevin) ZHU

City University of Hong Kong (CityU) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

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