Hostname: page-component-78c5997874-j824f Total loading time: 0 Render date: 2024-11-17T13:14:51.176Z Has data issue: false hasContentIssue false
  • English
  • Français

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

Published online by Cambridge University Press:  08 September 2022

Zhenhua Chen ,
Mehmet Cihan ,
Candace E. Jens Open the ORCID record for Candace E. Jens [Opens in a new window]  and
T. Beau Page
Zhenhua Chen
Affiliation:
Louisiana State University E. J. Ourso College of Business [email protected]
Mehmet Cihan
Affiliation:
[email protected]
Candace E. Jens*
Affiliation:
Martin J. Whitman School of Management at Syracuse University
T. Beau Page
Affiliation:
Office of the Comptroller of the Currency (OCC) [email protected]
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We study how firms alter investment projects to mitigate exposure to political uncertainty. We examine deal-level merger data and find that, in addition to delaying and forgoing merger announcements, acquirers shift merger announcements earlier in time to avoid the period between announcement and effective dates overlapping an election, shift targets geographically away from election states, decrease the size of election-year deals, and shift from equity to cash financing for election-year deals. These results are stronger for acquirers with tighter financial constraints and deals more likely to be financed with equity and show financing matters to firms’ responses to election uncertainty.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 1 , February 2023 , pp. 71 - 103
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee, Vineet Bhagwat (discussant), Paul Malatesta (the editor), Morad Zekhnini, and seminar participants at Tulane University, Louisiana State University, Shanghai Jiaotong University, and the 2018 AFA meeting for helpful comments and suggestions. The views in this article are those of the authors and do not necessarily reflect those of the Office of the Comptroller of the Currency or the U.S. Department of the Treasury.

References

Abel, A. B. “Optimal Investment Under Uncertainty.” American Economic Review, 73 (1983), 228–233.Google Scholar
Allison, P. D., and Waterman, R. P.. “Fixed-Effects Negative Binomial Regression Models.” Sociological Methodology, 32 (2002), 247–265.CrossRefGoogle Scholar
Atanassov, J.; Julio, B.; and Leng, T.. “The Bright Side of Political Uncertainty: The Case of R&D.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2693605 (2016).CrossRefGoogle Scholar
Baker, S. R.; Bloom, N.; and Davis, S. J.. “Measuring Economic Policy Uncertainty.” Quarterly Journal of Economics, 131 (2016), 1593–1636.CrossRefGoogle Scholar
Bernanke, B. S. “Irreversibility, Uncertainty, and Cyclical Investment.” Quarterly Journal of Economics, 98 (1983), 85–106.CrossRefGoogle Scholar
Bhagwat, V.; Dam, R. A.; and Harford, J.. “The Real Effects of Uncertainty on Merger Activity.” Review of Financial Studies, 29 (2016), 3000–3034.CrossRefGoogle Scholar
Bloom, N. “The Impact of Uncertainty Shocks.” Econometrica, 77 (2009), 623–685.Google Scholar
Bonaime, A.; Gulen, H.; and Ion, M.. “Does Policy Uncertainty Affect Mergers and Acquisitions?” Journal of Financial Economics, 129 (2017), 531–558.CrossRefGoogle Scholar
Cao, C.; Li, X.; and Liu, G.. “Political Uncertainty and Cross-Border Acquisitions.” Review of Finance, 23 (2019), 439–470.CrossRefGoogle Scholar
Çolak, G.; Durnev, A.; and Qian, Y.. “Political Uncertainty and IPO Activity: Evidence from U.S. Gubernatorial Elections.” Journal of Financial and Quantitative Analysis, 52 (2017), 2523–2564.CrossRefGoogle Scholar
Fuller, K.; Netter, J.; and Stegemoller, M.. “What Do Returns to Acquiring Firms Tell Us? Evidence from Firms That Make Many Acquisitions.” Journal of Finance, 57 (2002), 1763–1791.CrossRefGoogle Scholar
Gao, P.; Murphy, D.; and Qi, Y.. “Political Uncertainty and Public Financing Costs: Evidence from U.S. Gubernatorial Elections and Municipal Bond Markets.” Working Paper, available at https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=1992200 (2019).Google Scholar
García, D., and Norli, O.. “Geographic Dispersion and Stock Returns.” Journal of Financial Economics, 106 (2012), 547–565.CrossRefGoogle Scholar
Gillingham, K., and Tsvetanov, T.. “Hurdles and Steps: Estimating Demand for Solar Photovoltaics.” Quantitative Economics, 10 (2019), 275–310.CrossRefGoogle Scholar
Gulen, H., and Ion, M.. “Policy Uncertainty and Corporate Investment.” Review of Financial Studies, 29 (2016), 523–564.Google Scholar
Gungoraydinoglu, A.; Çolak, G.; and Öztekin, O.. “Political Environment, Financial Intermediation Costs, and Financing Patterns.” Journal of Corporate Finance, 44 (2017), 167–192.CrossRefGoogle Scholar
Hartman, R. “Factor Demand with Output Price Uncertainty.” American Economic Review, 66 (1976), 675–681.Google Scholar
Heider, F., and Ljungqvist, A.. “As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from State Tax Changes.” Journal of Financial Economics, 118 (2015), 684–712.CrossRefGoogle Scholar
Jens, C. E. “Political Uncertainty and Investment: Causal Evidence from U.S. Gubernatorial Elections.” Journal of Financial Economics, 124 (2017), 563–579.CrossRefGoogle Scholar
Jens, C. E., and Page, T. B.. “Corporate Cash and Political Uncertainty.” Working Paper, available at https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=3094415 (2021).Google Scholar
Julio, B., and Yook, Y.. “Political Uncertainty and Corporate Investment Cycles.” Journal of Finance, 67 (2012), 45–84.CrossRefGoogle Scholar
Julio, B., and Yook, Y.. “Policy Uncertainty, Irreversibility, and Cross-Border Flows of Capital.” Journal of International Economics, 103 (2016), 13–26.CrossRefGoogle Scholar
Kaviani, M. S.; Kryzanowski, L.; Maleki, H.; and Savor, P. G.. “Policy Uncertainty and Corporate Credit Spreads.” Journal of Financial Economics, 138 (2020), 838–865.CrossRefGoogle Scholar
Kelly, B. T.; Pástor, L.; and Veronesi, P.. “The Price of Political Uncertainty: Theory and Evidence from the Option Market.” Journal of Finance, 71 (2016), 2417–2480.CrossRefGoogle Scholar
Lambert, D. “Zero-Inflated Poisson Regression, with an Application to Defects in Manufacturing.” Technometrics, 34 (1992), 1–14.CrossRefGoogle Scholar
Leahy, J. V., and Whited, T. M.. “The Effect of Uncertainty on Investment: Some Stylized Facts.” Journal of Money, Credit, and Banking, 28 (1996), 64–83.CrossRefGoogle Scholar
Liu, J., and Zhong, R.. “Political Uncertainty and a Firm’s Credit Risk: Evidence from the International CDS Market.” Journal of Financial Stability, 30 (2017), 53–66.CrossRefGoogle Scholar
Majo, M. C., and van Soest, A.. “The Fixed-Effects Zero-Inflated Poisson Model with an Application to Health Care Utilization.” CentER Discussion Paper No. 2011-083, Tilburg University (2011).CrossRefGoogle Scholar
Messner, J. W.; Mayr, G. J.; and Zeileis, A.. “Heteroscedastic Censored and Truncated Regression with crch.” R Journal, 8 (2016), 173–181.CrossRefGoogle Scholar
Nguyen, N. H., and Phan, H. V.. “Policy Uncertainty and Mergers and Acquisitions.” Journal of Financial and Quantitative Analysis, 52 (2017), 613–644.CrossRefGoogle Scholar
Oi, W. Y. “The Desirability of Price Instability Under Perfect Competition.” Econometrica, 29 (1961), 58–64.CrossRefGoogle Scholar
Pástor, L., and Veronesi, P.. “Political Uncertainty and Risk Premia.” Journal of Financial Economics, 110 (2013), 520–545.CrossRefGoogle Scholar
Riddick, L. A., and Whited, T. M.. “The Corporate Propensity to Save.” Journal of Finance, 64 (2009), 1729–1766.CrossRefGoogle Scholar
Roberts, M. R., and Whited, T. M.. “Endogeneity in Empirical Corporate Finance.” In Handbook of the Economics of Finance, Vol. 2, Constantinides, G., Harris, M., and Stulz, R., eds. Amsterdam, Netherlands: Elsevier (2013), 493–572.CrossRefGoogle Scholar
Waisman, M.; Ye, P.; and Zhu, Y.. “The Effect of Political Uncertainty on the Cost of Corporate Debt.” Journal of Financial Stability, 16 (2015), 106–117.CrossRefGoogle Scholar
Supplementary material: PDF

Chen et al. supplementary material

Online Appendix

Download Chen et al. supplementary material(PDF)
PDF 288.8 KB