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Does Policy Uncertainty Affect Mergers and Acquisitions?

78 Pages Posted: 25 Jul 2016 Last revised: 31 May 2017

Alice A. Bonaime

University of Arizona

Huseyin Gulen

Purdue University - Krannert School of Management

Mihai Ion

University of Arizona - Department of Finance

Date Written: May 30, 2017

Abstract

Political and regulatory uncertainty is strongly negatively associated with merger and acquisition activity at the macro and firm levels. The strongest effects are for uncertainty regarding taxes, government spending, monetary and fiscal policies, and regulation. Consistent with a real options channel, the effect is exacerbated for less reversible deals and for firms whose product demand or stock returns exhibit greater sensitivity to policy uncertainty, but attenuated for deals that cannot be delayed due to competition and for deals that hedge firm-level risk. Contractual mechanisms (deal premiums, termination fees, MAC clauses) unanimously point to policy uncertainty increasing the target’s negotiating power.

Keywords: Mergers and Acquisitions, Policy Uncertainty, Real Options

JEL Classification: G18, G34

Suggested Citation

Bonaime, Alice A. and Gulen, Huseyin and Ion, Mihai, Does Policy Uncertainty Affect Mergers and Acquisitions? (May 30, 2017). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2813466 or http://dx.doi.org/10.2139/ssrn.2813466

Alice A. Bonaime (Contact Author)

University of Arizona ( email )

Eller College of Management
Department of Finance
Tucson, AZ 85721
United States

Huseyin Gulen

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Mihai Ion

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
5206210737 (Phone)

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