Dance with Wolves: Firm-Level Political Risk and Mergers and Acquisitions

Abstract

We examine whether and how firm-level perceived idiosyncratic political risk affects their mergers and acquisitions (M&A) decisions. We find that firms exposed to a high level of perceived political risk are less likely to conduct M&As. Furthermore, the negative association between firm-level political risk and M&As is more pronounced when firms lack either financial or nonfinancial capacities. More importantly, acquiring firms actively hedge against their perceived firm-level political risk by strategically choosing low-risk M&A targets and vertical integration. Finally, we show that effectively hedged deals exhibit superior post-M&A performance.

Keywords: political risk, mergers and acquisitions, risk management