Does policy uncertainty affect mergers and acquisitions?

By Alice Bonaimé, Huseyin Gulen, Mihai Ion. Journal of Financial Economics, 2017

842 citations recorded by the source corpus.

Using a recently developed measure of political and regulatory uncertainty, we document that policy uncertainty is strongly negatively associated with merger and acquisition activity at the macro and firm levels. Increases in policy uncertainty are associated with significant declines in aggregate deal volume and value, and in the likelihood of merger waves. Further, a one standard deviation increase in policy uncertainty is associated with an 8.9% decrease in acquisition likelihood (relative to the unconditional mean) during the following year. The effect of policy uncertainty varies in the cross section, with stronger effects if the target represents a less reversible investment, faces similar policy risk exposure, or if the acquirer's product demand or stock returns exhibit greater policy uncertainty sensitivity. The effect is attenuated for deals that cannot be delayed or result in vertical integration. To alleviate endogeneity concerns stemming from an omitted variable bias, we control for a wide array of proxies for overall economic conditions, potential valuation waves, and other sources of uncertainty and employ an instrumental variables approach.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/54a118fc1e7113ad4cd5942e85efcd0715199059

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Citations in the corpus

Policy uncertainty and corporate credit spreads (2020, neutral): “First, we contribute to the growing literature on the impact of policy and political uncertainty on corporate investment and financing decisions (Gulen & Ion (2016); Bonaime et al. (2016); Bradley, Pantzalis & Yuan (2016); Jens (2017); Francis et al.”
Policy uncertainty and loan loss provisions in the banking industry (2020, positive): “Baker et al. (2016) and Bonaime et al. (2018) find that fiscal (including taxes and government spending), regulatory and monetary policy are most important generators of policy uncertainty.”
Economic policy uncertainty, stakeholder engagement, and environmental, social, and governance practices: The moderating effect of competition (2020, background): “During periods of high uncertainty, firms increase their cash-holding (Phan et al., 2019) and decrease their merger and acquisition activities (Bonaime et al., 2018).”
Economic Policy Uncertainty And Corporate Cash Holdings (2017, positive): “Indeed, Bonaime et al. (2017) and Nguyen and Phan (2017) show that M&A activities are attenuated by increased policy uncertainty.”
Economic policy uncertainty and banks’ loan pricing (2019, background): “2016; Azzimonti 2018), firms would involve less in new merger and acquisition deals (Bonaime et al. 2018), initial public offerings would decrease (Çolak et al.”
Dividends and economic policy uncertainty: International evidence (2021, positive): “Following recent literature (e.g., Bonaime et al., 2018; Brogaard & Detzel, 2015; Gulen & Ion, 2015), we capture economic policy-related uncertainty using the aggregate policy uncertainty index developed by Baker et al. (2016) (henceforth BBD).”