The double-edged sword of political power in Chinese merger and acquisitions: CEOs, boards, and market reactions

This study examines how CEO political power influences merger and acquisition (M&A) decisions in China, focusing on the propensity to complete deals despite negative market reactions. Analyzing 1346 M&A deals by Chinese listed firms from 2008 to 2024, we find that politically powerful CEOs are more likely to finalize ‘bad’ deals (negative CARs), driven by personal motives such as compensation gains and reduced turnover risk, often leveraging private information for insider trading. Conversely, boards with greater political power relative to CEOs (higher PPD) enhance oversight, increasing the likelihood of canceling value-destroying M&As. These effects are more pronounced in non-SOEs, where state control is lower. Long-term performance analysis (OPER and BHAR) confirms that completed ‘bad’ deals under powerful CEOs harm firm value, while strong boards mitigate losses. Our findings highlight the critical role of political power dynamics in M&A governance, extending agency and network theories in China's unique institutional context.