Political uncertainty and domestic M&A activity. Evidence from national elections

OBJECTIVES OF THE STUDY: The aim of this study is to find out the effect of political uncertainty prior to national elections on domestic M&A activity, measured by the number of deals and the aggregate dollar value of deals during a time period of one quarter. The purpose is to investigate how actors on the M&A market treat uncertainty in the operating environment of companies to the extent it is affected by political process. It is also of interest whether certain country characteristics, political ideologies, and election tightness have an observable effect on magnitude of the proposed M&A cycle caused by electoral uncertainty. Furthermore, merger activity in the post-election period is studied. DATA AND METHODOLOGY: The empirical part of the research encompasses data from various sources. Election results are collected by hand, while other data are obtained mainly from SDC Platinum, the World Bank Database of Political Institutions, Thomson Reuters Worldscope, and the World Bank. The sample covers national elections and M&A deals between the years 1993 and 2011 from 25 countries, the most of which are members of the OECD. Panel data regressions with country and year fixed effects are used to test the hypotheses of the study. The baseline regressions on both the number of deals and the aggregate dollar value of deals include an election dummy as the main independent variable. The dummy variable gets the value of one during periods of higher electoral uncertainty; in this study, during three quarters prior to national elections. These baseline regressions are further modified according to each research question. Various robustness checks are conducted to assure the reliability of results. FINDINGS OF THE STUDY: The key finding of the study is that the amount of domestic M&A deals increases on average by 5.8% during three quarters prior to national elections, and election tightness has a smoothening effect on the increase. Neither country characteristics nor political ideologies are found significant for the relationship. Instead, no link between political uncertainty and the aggregate dollar value of deals is found. The main findings are further tested with extra regressions for robustness purposes, and similar results are confirmed