Economic Policy Uncertainty and Corporate Mergers and Acquisitions

Abstract

In recent years, the frequent adjustment of the government’s economic policies and the uncertainty of foreign economic situations have made the degree of uncertainty of China’s economic policies rise continuously. The increasing degree of policy uncertainty will inevitably affect the investment and financing decisions of micro enterprises. Then, how does economic policy uncertainty (EPU) affect mergers and acquisitions (M&A) behavior? What’s the mechanism? Based on the above questions, this paper uses the data of non-financial listed companies in the Shanghai and Shenzhen stock exchanges from 2008 to 2018 as a sample to explore the relationship between EPU and M&A. The study shows that rising EPU will promote corporate M&A behavior, and this effect is more significant in slow-growth companies. The relationship between EPU and M&A is affected by corporate governance, stock price volatility and financing constraints. Specifically, the company’s M&A size is more sensitive to EPU with higher level of corporate governance, higher level of stock price volatility, and lesser financing constraints. Further research shows that the rise of EPU will significantly promote the improvement of M&A performance in the short-term, but this effect does not exist in the long-term. Various robustness checks do not change the empirical results of this paper.