Good news or bad news? Cross-border mergers and acquisitions by politically connected emerging market firms

Purpose We evaluate the effect of political connections on the stock valuation of emerging market firms following the announcement of cross-border mergers and acquisitions (M&As). We further analyze the moderating roles of home and host market environments. Design/methodology/approach Our analysis of 361 Chinese cross-border M&A transactions during 2014–2018 employs an event-study methodology to assess the cumulative abnormal return (CAR) for acquirers. To test our hypotheses, we utilize a multiple regression model. Findings Politically connected firms experience a decrease in firm value following the announcement of cross-border M&As. However, this negative effect is weakened when the firm’s home region is more market-oriented, reflected by economic activity driven primarily by market mechanisms rather than government intervention. In contrast, the negative effect is strengthened when the host country exhibits higher governance quality, characterized by sound legal structures, labor regulations and developed capital markets. Originality/value Extending beyond previous studies on cross-border M&A performance, we analyze firm value based on signaling theory. Our findings reveal that market investors view cross-border M&As undertaken by politically connected firms from emerging economies with caution, resulting in a decline in acquirer value. Moreover, investors react more positively to cross-border M&As by politically connected acquirers in truly market-based regions. Conversely, investors expect that politically connected acquirers would encounter additional hurdles when executing cross-border M&As if the host country has high-quality governance.