Home country adverse political shocks and cross-border mergers and acquisitions financial performance of politically connected emerging market firms

Abstract

Adverse political shocks, such as removing a regime from office, are a prominent yet underexplored institutional characteristic of emerging markets. Based on protection motivation theory, we propose that adverse political shocks may decrease cross-border mergers and acquisitions (M&A) financial performance of politically connected emerging market firms (EMFs). This is because disruptive threats from political shocks are more likely to lead CEOs of acquiring firms to focus on how to employ cross-border M&As to move assets overseas for self-protective purposes, thus giving less consideration to the strategic values of deals. Therefore, M&A’s financial performance will be compromised. Such threat-led protection motivation is predicted to be stronger when the threats of adverse political shocks are appraised as being more severe and more likely to occur (i.e., when the politically connected EMFs engage in more bribery activity) and when CEOs believe they are capable of conducting protective actions to cope with threats (i.e., when CEOs have greater power). With a sample of 224 outbound cross-border M&A deals by Chinese firms two years (eight quarters) before and after the outbreak of the Bo Xilai scandal, the results support our predictions.