Firm-level economic policy uncertainty and M&A: Evidence from MD&A textual analysis

Abstract

This paper examines how firm-level economic policy uncertainty (FEPU) affects the mergers and acquisitions (M&A) decisions of listed firms. Using a sample of 33,078 firm-year observations from 4356 Chinese listed firms between 2007 and 2022, we find a consistent negative relationship between FEPU and M&A activity. Our analysis shows that this negative effect is more pronounced in firms with higher irreversibility of investment, supporting the real options theory. It is also more significant in firms with higher financial constraints and in non-state-owned enterprises (non-SOEs), consistent with the risk premia theory. Additionally, the negative effect is stronger in firms with weaker governance structures, aligning with the agency theory. Our analyses also demonstrate that industry regulations and managerial characteristics significantly moderate the impact of FEPU on M&A motivation. Specifically, firms in less regulated industries experience a more pronounced negative effect of FEPU on M&A. Moreover, the risk aversion of older CEOs and female managers further amplifies the adverse impact of FEPU on M&A activities. Overall, by emphasizing the distinctiveness of FEPU compared to macro-level economic policy uncertainty measures, our study provides novel firm-level evidence on how economic policy uncertainty affects M&A activities.