Policy Uncertainty and Mergers and Acquisitions

Nguyen, Nam Hoang; Phan, Hieu V.

doi:10.1017/s0022109017000175

Cited by 414 publications

(228 citation statements)

References 58 publications

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“…Therefore, in line with the real option theory, it is predicted that policy uncertainty is likely to adversely affect firm acquisitiveness. Consistent with this prediction, two recent studies, Nguyen and Phan () and Bonaime et al . (), both document a negative association between the policy uncertainty index and M&A activities in the United States.…”

Section: Political Uncertainty and Corporate Policiessupporting

confidence: 66%

Political Uncertainty and Finance: A Survey

Dai

Zhang

2019

Asia-Pac J of Fin Stud

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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 ...

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Section: Political Uncertainty and Corporate Policiessupporting

confidence: 66%

Political Uncertainty and Finance: A Survey

Dai

Zhang

2019

Asia-Pac J of Fin Stud

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“…They demonstrate that uncertainty commands an equity risk premium, especially during weaker economic conditions. Others have linked EPU with the effectiveness of monetary policy (Aastveit, Natvik, & Sola, 2013), economic recessions (Stock & Watson, 2012), merger and acquisition activities (Bonaime, Gulen, & Ion, 2018;Nguyen & Phan, 2017), aggregate bank credit growth (Bordo et al, 2016), bank liquidity creation (Berger, Guedhami, Kim, & Li, 2017), daily jumps in stock and bond markets (Baker, Bloom, & Davis, 2015), gold futures market volatility (Fang, Chen, Yu, & Qian, 2017), corporate credit spreads (Kaviani, Kryzanowski, Maleki, & Savor, 2017), mutual fund flow-performance sensitivity (Starks & Sun, 2016), the time series predictability of momentum profits (Gu, Sun, Wu, & Xu, 2016), and stock market participation (Agarwal, Aslan, & Ren, 2017). Brogaard and Detzel (2015) find that policy uncertainty positively forecasts the equity risk premium and argue that EPU is an economically important risk factor for equities.…”

Section: Effects Of Epu On Financial Marketsmentioning

confidence: 99%

Economic policy uncertainty, CDS spreads, and CDS liquidity provision

Wang

Zhong

2018

Journal of Futures Markets

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Using a news‐based index of economic policy uncertainty (EPU), we find that EPU is positively associated with credit default swap (CDS) spreads and negatively associated with the number of liquidity providers in the CDS market. A 10% increase in EPU leads to an 8.4% increase in CDS spreads and a 4.0% decrease in the number of liquidity providers. Furthermore, the effects of EPU are persistent and robust after controlling for macroeconomic variables. Our results are also robust to different econometric methodologies. Overall, our findings suggest that, when EPU is high, investors find credit protection more costly and difficult to purchase.

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“…Therefore, it is urgently necessary to understand how economic policy uncertainties (EPU) are influencing Chinese firms’ overseas investments, one of the most important factors impacting firms’ investment decisions. Most existing empirical studies examine how EPU influences firms’ domestic investments (Julio and Yook, ; Kang et al ., ; Wang et al ., , ; Gulen and Ion, ; Nguyen and Phan, ). However, no prior study has examined the link between EPU and firms’ overseas investments.…”

Section: Introductionmentioning

confidence: 99%

When to go abroad: economic policy uncertainty and Chinese firms’ overseas investment

Zhang

et al. 2019

Accounting & Finance

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We study how economic policy uncertainty (EPU) influences firms' overseas investments for Chinese listed companies. We find a significant negative relationship between EPU and firms' overseas investments after controlling for firm characteristics and macroeconomic variables. Chinese firms seem to reduce their overseas investments on fixed income securities when facing domestic policy uncertainty. The negative relationship is pronounced for financially constrained firms, firms relying on government subsidies and with low overseas revenues, and SOEs. Firms operating in high marketisation regions can mitigate the negative effect of EPU on firms' overseas investments. Our results remain significant when considering endogeneity problems.

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Policy Uncertainty and Mergers and Acquisitions

Cited by 414 publications

References 58 publications

Political Uncertainty and Finance: A Survey

Political Uncertainty and Finance: A Survey

Economic policy uncertainty, CDS spreads, and CDS liquidity provision

When to go abroad: economic policy uncertainty and Chinese firms’ overseas investment

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