Financial stress, economic policy uncertainty, and market volatility: implications for cross-border acquisition activity

Cross-border acquisitions (CBAs) play a crucial role in global business strategies but are influenced by various macroeconomic factors. By applying real options theory, this study investigates the impact of financial stress, economic policy uncertainty, and equity market volatility on CBA inflows in the U.S. using 3,479 observations from 137 countries (1990–2023). We examine whether these factors create opportunities for multinational enterprises (MNEs) to acquire assets at discounted prices or deter investments due to increased uncertainty. Employing econometric models to test hypotheses based on real options theory, we elucidate the interplay between host country economic conditions and foreign investment decisions in CBAs. The results show that financial stress and equity market volatility positively affect CBA inflows, as MNEs exploit undervalued opportunities during turbulent periods. In contrast, economic policy uncertainty reduces CBA inflows and discourages firms from investing in uncertain environments. Advanced economy firms leverage financial turbulence and equity market volatility more effectively than emerging economy firms, which are more sensitive to economic policy uncertainty and institutional distance. These findings underscore the importance of economic development in influencing firm strategies for managing uncertainty in international investments and offer insights into CBA determinants. This study informs MNE managers and emphasizes the need for customized risk assessment frameworks. Policy implications suggest that host countries can attract investors by reducing economic policy uncertainty, maintaining policy stability, leveraging periods of financial stress to boost foreign investment and economic recovery, and balancing investor interests.