When Worlds Collide: The Dynamics between M&A and Geopolitical Risk

Abstract: We empirically investigate the relationship between geopolitical risk and mergers and acquisitions (M&A) between 1985-2022 by U.S. public acquirers, using the index of Caldara and Iacoviello (2022) as a proxy. Our findings indicate that magnified risk is coupled with a drop in both the total deal volume and value, as well as an enduring decline in the M&A probability. Additionally, we discover a negative trend suggesting that merger waves get delayed, although the empirical evidence is deemed as rather weak. Nevertheless, there is strong support for the absence of hedging through vertical integration, notwithstanding upsurged tensions. Yet, in contrast to these undesirable transaction adversities, distressed acquisitions appear to become more prevalent even in the face of geopolitical spikes. Finally, the injurious impact predominantly stems from threats and associated expectations rather than actual world events.