Does Safety Uncertainty Affect Acquisitions?

Abstract

Using terrorist attacks as an exogenous shock to safety uncertainty, we provide causal evidence that firms located near terrorism-stricken areas receive lower takeover premium. The latter finding is reflected in lower target firm abnormal returns and synergy gains. Additionally, given that firms in terrorism-afflicted areas become less attractive, they are less likely takeover targets for two years after the terrorist attack, and acquirers from such areas are more likely to buy target firms from more distant locations. We attribute our results to human capital which is affected by terrorism induced safety uncertainty, consistent with Abadie and Gardeazabal’s (2008) theoretical model.

Keywords: Terrorism, Mergers and Acquisitions (M&As), Takeover Premium, Abnormal Returns, Human Capital, Labor Productivity

JEL Classification: G14, G34, J31