The Economic Effects of Political Polarization: Evidence from the Real Asset Market

Abstract

The rise of political polarization in the United States affected the landscape of the real asset market for mergers and acquisitions. Mergers between politically divergent firms became less common over time, and those between firms from politically divergent states have virtually disappeared in recent years. We provide estimates from deal-level data to investigate the mechanisms underlying these dramatic trends. We find that the likelihood of merger announcement is considerably lower for politically divergent firms. This effect in concentrated in periods when political polarization is high, when firms plan to integrate their operations, and outside economic recessions. If announced, mergers between divergent firms are less likely to be completed, more likely to be hostile, and generate lower announcement returns and poorer post-merger operating performance. These findings hold in specifications that include industry-by-year and deal fixed effects, and after controlling for geographical distance, product similarity, and existing measures of corporate cultural differences between firms. Collectively, our findings provide some of the first evidence on the real economic effects of the rise in political and affective polarization.

Keywords: political polarization, campaign contributions, mergers and acquisitions

JEL Classification: G34, D72