Does Geopolitical Risk Affect Acquisitions?

Abstract

Geopolitical risk (GPR) is strongly negatively associated with merger and acquisition activity. In support of the predictions of a real options channel, the negative effect of GPR is more pronounced when target firms have relatively more irreversible assets, operate in industries with lower competition, and when acquirers are financially constrained. Additionally, during periods of high GPR, acquirers become more cautious experiencing higher stock abnormal returns. Finally, consistent with the interim risk mechanism, deals announced during high GPR periods exhibit shorter time to completion, higher takeover premiums, and lower likelihood of target termination fees, indicating increase in target firms’ negotiation power.

Keywords: Mergers and Acquisitions (M&As), Geopolitical Risk, Real Options, Interim Risk

JEL Classification: G14, G34