Abstract
We find that political connections can help firms mitigate the negative impact of Economic Policy Uncertainty (EPU) on the frequency and dollar value of acquisitions in a sample of Chinese firms from 2007 to 2019. The effect is stronger for firms with higher EPU sensitivity, with higher leverage, and in heavily regulated energy and agricultural sectors. The impact of political connections appears to be based on the information advantage and not on the financing channel. A government anti-corruption rule introduced in 2013 prohibiting current and former officials from working for enterprises is used as an exogenous shock to political connections to mitigate endogeneity concerns. The prohibition appears to reduce acquisition activities when EPU is high.
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