Institutions and the performance of politically connected M&As

We investigate the association between a firm's political connections and its merger and acquisition (M&A) performance. Using a sample of M&A deals made by politically connected acquirers and their matched non-connected peers across 22 countries, we find that political connections play an economically significant role in post-merger performance. The nature of this effect depends on the institutional setting. In countries with strong legal systems or low levels of corruption, politically connected bidders underperform unconnected bidders by roughly 15% in terms of abnormal stock returns over a 3-year period. In contrast, politically connected bidders outperform unconnected bidders by more than 20% in countries with weak legal systems or high levels of corruption. We find more evidence of differential post-merger performance for domestic mergers than for cross-border mergers. Overall, our findings show that political connectedness has a significant influence on M&A activities, and the nature of this influence depends crucially on the institutional environment.