Policy Uncertainty Affects M&A Outcomes: Japan Evidence
Abstract
This study examines how economic policy uncertainty affects mergers and acquisition outcomes. Using the two samples of firm-level data and deal-level data on Japanese M&A from 1989 to 2020 with industry fixed effect and cluster for standard errors by industry to identify the impacts of uncertainty on deal characteristics to check whether the impacts on Japanese deals are consistent with that on the U.S deals or not. That is because the M&A deal characteristics might differ between Japan and U.S due to the difference in capital structure. Existing literature shows that the bank-based system in Japan controls the M&A investment decisions of other firms via the ownership and lending relationship to gain the best interest of the banks while the market-based system in the U.S operates in the competitive mechanism. There are many papers on market based systems while that on the bank-based system are scarce, then this study aims to contribute to the literature by investigating on Japanese M&A sample. We investigate the impacts of economic policy uncertainty on M&A deals via two channels: expected financing cost and real options channel. The results show that the deals involving the more financially constrained acquirers and the higher targets investment irreversibility are more negatively impacted by uncertainty. Further analyses confirmed the effects of uncertainty on deal characteristics including cross-border mergers, time to completion, cash payment, and bid premium. This study provides insights into the impacts of economic policy uncertainty on M&A deal characteristics.