Does Resolution of Trade Policy Uncertainty Affect Shareholder Returns in Mergers and Acquisitions?

Abstract

We use a change in US trade policy, which eliminated potential tariff increases on Chinese imports, to examine the effect of resolution of trade policy uncertainty on merger and acquisition (M&A) activity and shareholder value of acquiring and target firms. After this policy change, industries with greater resolution of tariff uncertainty experience higher within-industry and cross-industry M&A activity, and acquiring firms in these industries experience higher announcement returns, but there is no corresponding effect on target announcement returns. Acquirer shareholder wealth effects are stronger for R&D-intensive acquirers; in transactions involving publicly-traded targets, especially for less profitable and high-leverage targets; and for cross-industry acquisitions, especially those in which the target is in a less competitive and less fluid product market than the acquirer. The effects on acquirer shareholder wealth indicate that elimination of trade policy uncertainty and increase in import competition raise the bargaining power of acquirers relative to targets.

Keywords: Mergers and Acquisitions, Trade Policy Uncertainty, Shareholder Wealth, Product Market Competition

JEL Classification: G34, P33