Does Geopolitical Risk Affect Acquisitions?

Abstract

Geopolitical risk (GPR), which is a source of uncertainty that has the distinct feature to stem primarily outside the US borders but still affect the US firms, is negatively associated with the US overall, as well as cross-border, acquisition activity. By employing the GPR measure proposed by Caldara and Iacoviello (2022), we find that the negative effect of GPR is more pronounced when acquirers have foreign activities or are financially constrained, and when targets have more irreversible assets or operate in industries with lower competition. Finally, during high GPR periods, acquirers are more cautious engaging in value-increasing deals. Our results support the predictions of the real options theory.

Keywords: Mergers and Acquisitions (M&As), Geopolitical Risk, Real Options, Acquisition Likelihood, Abnormal Returns

JEL Classification: G14, G34