How Policy Uncertainty Affects M&A

Uncertainty about government economic policy reduces corporate investment and increases financing costs, as prior research has shown. In our new paper, we examine the relationship between policy uncertainty and M&A and the implications for shareholder value. We use the BBD policy uncertainty index developed by Baker, Bloom, and Davis (2016) as a proxy to examine how policy-related economic uncertainty affects firm acquisitiveness, the time it takes to complete a deal, the method of payment, and acquirer and target shareholder value. The BBD index is based on the weighted average of three components: the frequency of newspaper articles containing key terms related to policy uncertainty, uncertainty about future changes in the federal tax code (measured by the dollar impact of tax provisions set to expire in the near future), and the differences in economic forecasts of government spending and CPI as a proxy for uncertainty about future fiscal and monetary policy.

Using a sample of 88,768 annual observations of 9,673 different firms from 1986–2014, we find that policy uncertainty is negatively related to firm acquisitiveness. Our further analysis indicates that policy uncertainty is associated with slower deal completion. Acquirers also pay less for targets during periods of high policy uncertainty as evidenced by their preference for payment in stock and lower bid premiums. Moreover, M&A during uncertain periods appears to improve acquirer operating performance and create greater shareholder value, which are attributable to the lower prices and the transfer of value from financially constrained targets to acquirers. Overall, our findings demonstrate that policy uncertainty not only reduces firm acquisitiveness and delays deals but also motivates acquirers to carefully screen targets and get more favorable terms, thereby creating value for acquirer shareholders. Finally, we find that policy uncertainty reduces the number and aggregate value of deals in an industry, indicating the far-reaching consequences of policy uncertainty.

Our study adds to burgeoning research that examines the effects of policy uncertainty on corporate behavior. Our research focuses on the relationship between uncertainty and M&A, one of the most important forms of corporate investment, and further considers its effect on acquirer shareholder value. The research highlights the negative effect of policy uncertainty on financially constrained firms’ operations. Our evidence suggests that policy uncertainty weakens the bargaining power of financially constrained targets, resulting in a lower value for their shareholders. Finally, our findings can have timely implications for policy and corporate decision makers, which can be particularly useful at a time of wide swings in policy uncertainty and the adverse effects of those swings on the economy.

This post comes to us from Professor Nam H. Nguyen at the University of Quebec in Montreal and Professor Hieu V. Phan at the University of Massachusetts in Lowell. It is based on their recent paper, “Policy Uncertainty and Mergers and Acquisitions,” available here.




1 Comment

  1. Tracy Broderick

    Congratulations on your paper! What a remarkable accomplishment to have it published at Columbia!

    Wishing you all the best!

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