Does Geopolitical Risk Affect Mergers and 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 effects of GPR are more pronounced when acquirers are financially constrained, in more complex deals, and when target firms have relatively more irreversible assets or operate in industries with lower competition. Additionally, during periods of high GPR, acquirers, become more cautious in the deals they conduct and experience higher announcement stock returns. Finally, deal premiums and target termination fees unanimously confirm the increased negotiation power of target firms around during periods of high geopolitical risk.

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

JEL Classification: G14, G34, J31