Does Geopolitical Risk Affect Acquisitions?

Abstract

Geopolitical risk (GPR) is negatively associated with both domestic and inbound cross-border acquisition activity. In support of the predictions of a real options channel, the negative effect of GPR is more pronounced when acquirers have foreign business segments or are financially constrained, and when targets have more irreversible assets or operate in industries with lower competition. Additionally, during high GPR periods, acquirers become more cautious experiencing higher stock returns. Finally, in announced deals, consistent with the interim risk mechanism, GPR is associated with shorter time to deal completion, higher takeover premiums, and lower likelihood of target termination fees, indicating an increase in targets’ negotiation power.

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

JEL Classification: G14, G34