Political risk, financial constraint, and managerial risk preference: evidence from M&A decisions

Abstract

This study examines the relationship between firm-level political risk and mergers and acquisitions (M&As). While many studies investigate political uncertainty at the macro-level, we use a firm-specific measure of political risk to account for heterogeneity in each firm’s exposure to the political environment. We find that political risk has a negative relationship with the likelihood of M&A announcement. Specifically, financial constraints and managerial risk preference provide the mechanisms in which political risk affects acquisition likelihood. Furthermore, we find a negative association between political risk and firm performance after deal completion.