Does Geopolitical Risk Affect Mergers and Acquisitions?

Abstract

This study examines the relationship between geopolitical risk (GPR) and mergers and acquisitions (M&As). Our findings indicate that GPR negatively affects firm-level acquisitiveness. Supporting our predictions of the real options channel, the negative effects of GPR are strongest for more financially constrained bidders, more complex deals, targets with more irreversible assets and non-multinational bidders. In addition, during periods of high GPR, we find that acquirers, on average, become prudent and perform value-creating deals. Following periods of high GPR, acquirers complete deals more quickly and avoid offering stocks as a payment method. Lastly, deal premiums and target termination fees unanimously confirm the increased negotiation power of targets around high GPR periods.

Keywords: geopolitical risk, mergers and acquisitions (M&As)

JEL Classification: G14; G34; J31