Political Uncertainty and Firm Investment:  Project-Level Evidence from M&amp;A Activity

Chen, Zhenhua; Cihan, Mehmet; Jens, Candace

doi:10.2139/ssrn.2807242

Cited by 16 publications

(10 citation statements)

References 29 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Given the important economic implications of political/policy uncertainty, scholars in the fields of economics and finance are beginning to explore the impact of political/policy uncertainty on real economic outcomes. They find that political/policy uncertainty not only affects business cycles, capital inflows, and economic recoveries at the macro level (Bloom 2009; Julio and Yook 2012; Baker et al 2016), but also impacts investment (Gulen and Ion 2016; Jens 2017), merger and acquisition activities (N. H. Nguyen and Phan 2017; Bonaime et al 2018), cash holding (Julio and Yook 2012), capital expenditure (Jens 2017; Z. Chen et al 2018), research and development (Atanassov et al 2019), external financing (Çolak et al 2017; Jens 2017; Bonaime et al 2018), and dividend payout (Huang et al 2015) at the firm level. Studies of the effects of political/policy uncertainty on capital markets show that it decreases firm valuation (Tirtiroglu et al 2004; Graham et al 2005, 2012) and increases stock price volatility, stock price crash risk, and mispricing (Boutchkova et al 2012; Baker et al 2016; J. Chen et al 2017; Liu et al 2017; X. Jin et al 2019; Chan et al 2020; Fan et al 2020).…”

Section: Introductionmentioning

confidence: 99%

Political/Policy Uncertainty, Corporate Disclosure, and Information Asymmetry*

Lei

Luo

2022

Accounting Perspectives

View full text Add to dashboard Cite

Political/policy uncertainty causes significant disruption to capital markets around the world. This review synthesizes recent studies on this topic and provides suggestions for future research in this fast-growing area. Specifically, this review focuses on three areas of research: (i) the measurement of political/policy uncertainty, (ii) the impact of political/policy uncertainty on financial analysts' forecasts, and (iii) the impact of political/ policy uncertainty on corporate disclosure. We find that political/policy uncertainty affects both corporate disclosures and financial analysts' forecasts and that these effects interact with information asymmetry in capital markets. Furthermore, we find that companies strategically change their disclosure practices during periods of heightened political/ policy uncertainty.

show abstract

Section: Introductionmentioning

confidence: 99%

Political/Policy Uncertainty, Corporate Disclosure, and Information Asymmetry*

Lei

Luo

2022

Accounting Perspectives

View full text Add to dashboard Cite

show abstract

“…() and Chen et al . () document the evidence on cross‐border and cross‐state M&As influenced by intercountry and interstate uncertainty, respectively. Brogaard et al .…”

Section: Future Researchmentioning

confidence: 95%

“…Consistent with the finding revealed in prior literature that political uncertainty adversely affects investment (e.g., Julio and Yook, ; Jens, ), Chen et al . () find that acquirers themselves are less likely to engage in acquisition activities if there is an upcoming election in their headquartered state, suggesting that political uncertainty increases acquirers’ risk premia around elections, thereby leading them to pull back M&A investment. The authors also show that acquirers tend to select fewer targets from a state with an upcoming election.…”

Section: Political Uncertainty and Corporate Policiesmentioning

confidence: 97%

“…In a similar vein, Chen et al . () use the gubernatorial election cycle in the United States to study the impact of political uncertainty on M&A deals, as well as the channels through which political uncertainty affects M&A decisions. Consistent with the finding revealed in prior literature that political uncertainty adversely affects investment (e.g., Julio and Yook, ; Jens, ), Chen et al .…”

Section: Political Uncertainty and Corporate Policiesmentioning

confidence: 99%

See 1 more Smart Citation

Political Uncertainty and Finance: A Survey

Dai

Zhang

2019

Asia-Pac J of Fin Stud

View full text Add to dashboard Cite

An emerging stream of literature investigates the impact of political uncertainty on financial markets. In this survey, we review this line of literature from four perspectives, namely, asset prices, corporate policies, financial intermediaries, and economy and households, suggesting that political uncertainty generally increases market friction and as a result changes corporate behavior and adversely affects the economy. At the end of the survey, we discuss a few future directions worth being explored in view of the relationship between political uncertainty and finance. most likely to occur if the old policy has led to unexpected low realized profitability. Therefore, policy change can increase firms' expected profitability, thereby pushing stock prices up, that is, the cash flow effect. However, due to the new policy's higher uncertainty, policy change can also increase discount rates, thereby pushing stock prices down, that is, the discount rate effect. The authors show analytically that, on average, the discount rate effect will outweigh the cash flow effect and stock prices will fall at the announcement of a government policy change. The reason is that positive announcement returns tend to be small as policy changes that have the potential to push stock prices up are mostly expected by investors. Moreover, as new policies introduce more uncertainty and raise the volatility of the stochastic discount factor, government policy changes will increase stock return volatilities and correlations.Closely related to P astor and Veronesi (2012, 2013) analyze the risk premium induced by political uncertainty. P astor and Veronesi (2013) extend the general equilibrium model developed by P astor and Veronesi (2012) in two key aspects. First, unlike P astor and Veronesi (2012) who assume political cost is unknown to investors, P astor and Veronesi (2013) allow investors to learn about the political costs of the new policies through the stream of political news. Second, P astor and Veronesi (2012) assume that all government policies are identical a priori, whereas P astor and Veronesi (2013) allow the government to choose from a set of heterogeneous policies. The impacts of both, the learning about political costs and policy heterogeneity, are larger in weak economic conditions when a policy change is more likely to happen.Accordingly, in P astor and Veronesi's (2013) analytic model, stock returns are driven by capital shocks, impact shocks, and political shocks, and correspondingly the equity risk premium can be decomposed into three components based on the three types of shocks. As the optimal choice for the government is to change its policy when the old policy is perceived as sufficiently unfavorable, the authors show analytically that the composition of the risk premium varies depending on the economic state. In weak economic conditions when the probability of a policy change is high, the equity risk premium is largely driven by the political risk premium. However, in strong economic conditions when a policy change ...

show abstract

“…Announcement-period acquirer-stock prices likely react to the possibility of, or the lack of, expected synergies between the organizations, integration issues and restructuring plans (Angwin 2001). Several papers have analyzed abnormal returns around M&A announcement or effective dates (e.g., Hofstede 1980;Masulis et al 2007;Aybar and Ficici 2009;Francis and Martin 2010;Harford et al 2012;Ahern et al 2012;McNichols and Stubben 2015), internal controls (e.g., Chen et al 2016;Albuquerque et al 2018;Surbhi and Vij 2018), or acquirer's operating performance (e.g., Francis and Martin 2010). However, it is likely that stock returns around announcement reflect short-term market sentiment about the deal, but may not fully reflect competitive advantages, or the lack thereof, in the longer run from cross-border M&As.…”

Section: Literature Reviewmentioning

confidence: 99%

Market Misreaction? Evidence from Cross-Border Acquisitions

Krishnan

2022

JRFM

View full text Add to dashboard Cite

Our goal in this paper is to answer this research question: Do investors understand the longer-term value-implications of cross border mergers and acquisitions, as at the time of their announcements? We examine acquirers’ operating efficiencies around and after cross-border acquisitions and relate this to the announcement-period stock-market reaction. Using a dataset of cross-border mergers and acquisitions (M&A) entailing U.S. acquirers over the period 1990–2013, and using a bootstrapped-DEA (Data Envelopment Analysis) model because any one indicator may not reflect the whole performance of the merger, we find that the operating efficiency of the acquirers decreases around the acquisition, and up to three years after. However, we document evidence of stock market mis-reaction at announcement: the announcement-period acquirer abnormal stock-price return is not significantly associated with acquirer’s operating efficiency post-acquisition. Therefore, investors should be careful interpreting the announcement-period stock-price reaction in cross-border mergers and acquisitions as indicative of merger efficiency gains.

show abstract

Political Uncertainty and Firm Investment: Project-Level Evidence from M&A Activity

Cited by 16 publications

References 29 publications

Political/Policy Uncertainty, Corporate Disclosure, and Information Asymmetry*

Political/Policy Uncertainty, Corporate Disclosure, and Information Asymmetry*

Political Uncertainty and Finance: A Survey

Market Misreaction? Evidence from Cross-Border Acquisitions

Contact Info

Product

Resources

About