Bilateral Political Relations and Cross-Border M&As

We examine the role of bilateral political relations on cross-border merger and acquisition (M&A) activities. Based on a large sample of cross-border deals during 1990- 2010, we find strong and robust evidence that bilateral political relations have large and significant causal effects on cross-border M&As. A one-standard-deviation increase in political affinity leads to a 23% increase in the number of deals and a 44% increase in the total deal value. This effect is stronger for targets in strategic industries and targets owned by government, suggesting direct government involvement. We also find a stronger effect in acquisitions with higher investment irreversibility, suggesting higher 2 investor caution with declining political affinity. Our findings are robust to alternative model specifications, different variable measurements, and tests for endogeneity