Presentation Title

Political Corruption and Merger Return

Start Date

November 2016

End Date

November 2016

Location

Watkins 1117

Type of Presentation

Oral Talk

Abstract

It is well established in the literature that in large mergers and acquisitions (M&A) target firms reap the majority of the stock market gains while acquiring firms usually break even or experience losses. Using financial market and M&A data, I calculate the cumulative abnormal returns (CARs) that accrue to the participating firms in response to their announcement of an M&A. The abnormal returns are an indication of the economic impact that such an event has on the value of the firms in question. Although on average the returns to acquirors are not different from zero, in this study I document significantly positive CARs for acquirors that are headquartered in U.S. regions with higher levels of political corruption and who pay cash for the transaction. Specifically, I show that abnormal returns increase as the corruption gap between the acquiring and target firms increases. Overall, the evidence is consistent with the hypothesis that firms manage liquidity downward, converting cash to harder-to-expropriate operating assets, to limit expropriation by corrupt local officials.

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Nov 12th, 2:15 PM Nov 12th, 2:30 PM

Political Corruption and Merger Return

Watkins 1117

It is well established in the literature that in large mergers and acquisitions (M&A) target firms reap the majority of the stock market gains while acquiring firms usually break even or experience losses. Using financial market and M&A data, I calculate the cumulative abnormal returns (CARs) that accrue to the participating firms in response to their announcement of an M&A. The abnormal returns are an indication of the economic impact that such an event has on the value of the firms in question. Although on average the returns to acquirors are not different from zero, in this study I document significantly positive CARs for acquirors that are headquartered in U.S. regions with higher levels of political corruption and who pay cash for the transaction. Specifically, I show that abnormal returns increase as the corruption gap between the acquiring and target firms increases. Overall, the evidence is consistent with the hypothesis that firms manage liquidity downward, converting cash to harder-to-expropriate operating assets, to limit expropriation by corrupt local officials.