The Economic Effects of Political Polarization: Evidence from the Real Asset Market

62 Pages Posted: 16 Dec 2019 Last revised: 3 Apr 2023

See all articles by Ran Duchin

Ran Duchin

Boston College - Carroll School of Management

Abed El Karim Farroukh

Indiana University - Kelley School of Business

Jarrad Harford

University of Washington; European Corporate Governance Institute (ECGI)

Tarun Patel

Southern Methodist University (SMU) - Finance Department

Date Written: November 17, 2021

Abstract

The rise of political polarization in the United States affected the landscape of the real asset market for mergers and acquisitions. Mergers between politically divergent firms became less common over time, and those between firms from politically divergent states have virtually disappeared in recent years. We provide estimates from deal-level data to investigate the mechanisms underlying these dramatic trends. We find that the likelihood of merger announcement is considerably lower for politically divergent firms. This effect in concentrated in periods when political polarization is high, when firms plan to integrate their operations, and outside economic recessions. If announced, mergers between divergent firms are less likely to be completed, more likely to be hostile, and generate lower announcement returns and poorer post-merger operating performance. These findings hold in specifications that include industry-by-year and deal fixed effects, and after controlling for geographical distance, product similarity, and existing measures of corporate cultural differences between firms. Collectively, our findings provide some of the first evidence on the real economic effects of the rise in political and affective polarization.

Keywords: political polarization, campaign contributions, mergers and acquisitions

JEL Classification: G34, D72

Suggested Citation

Duchin, Ran and Farroukh, Abed El Karim and Harford, Jarrad and Patel, Tarun, The Economic Effects of Political Polarization: Evidence from the Real Asset Market (November 17, 2021). Available at SSRN: https://ssrn.com/abstract=3497907 or http://dx.doi.org/10.2139/ssrn.3497907

Ran Duchin (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Abed El Karim Farroukh

Indiana University - Kelley School of Business ( email )

United States

HOME PAGE: http://https://sites.google.com/view/farroukh

Jarrad Harford

University of Washington ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)

HOME PAGE: http://faculty.washington.edu/jarrad/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Tarun Patel

Southern Methodist University (SMU) - Finance Department ( email )

United States

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