Political Risk, Bargaining Power, and the Target Selection of Cross-Border Acquisitions

This study employs the firm-level political risk index by Hassan et al. (Q J Econ 134:2135–2202, 2019) to analyze political risk and the target selection decisions in cross-border acquisitions. We draw on bargaining power theory to illustrate the incentives for acquirers to undertake cross-border acquisitions amid political risk. A sample of 1106 international acquisitions by US-listed firms is collected to test the bargaining power hypothesis in international acquisitions. We find that acquirers with higher political risk tend to acquire targets with higher political risk and pay lower premiums. Moreover, the evidence suggests that the positive relationship between the political risk of acquirers and targets is stronger when acquirers and targets operate in related industries and culturally similar countries. The findings are robust to endogenous biases, subsample tests, and an alternative measure of political risk.