Research On The Effect Of Economic Policy Uncertainty On Corporate Acquisition

Due to the fast technology advancement,the emergence of new middle class,and the complex international political and economic situation,firms are confronted with a more and more uncertain external environment.Among these uncertain factors,economic policy uncertainty is one of the most serious type of macro uncertainty factor for firms.The definition of economic policy uncertainty can be defined in this way where economic agents cannot precisely predict the extent and effect of economic policy.Especially,in China,one emerging country which is still on the period of institution transition,government has been playing an important role in economy operating and resource allocation,the process of economic policy making is very opaque,and the frequency and range of policy adjustment are huge,which lead to economic policy uncertainty is more relevant to Chinese firms.The economic policy uncertainty index made by Baker,Bloom,and Davis(2016)shows that the centre of Chinese economic policy index has been shifting upward since the financial crisis of 2008,indicating that Chinese economic policy uncertainty has been growing.The related academic literature shows that economic policy uncertainty has a profound effect on the investment,R&D activity,financial cost,and firm performance.It is a pity that there is no extant literature who deeply investigate the effect of economic policy uncertainty on corporate M&A activity,nor scholars don't come an unified conclusion about whether economic policy uncertainty has a positive effect or negative effect on firms.On the other hand,acquisition activity is one of the most important corporate investment.It isn't only a vital strategic tool,but also has an important effect on economic resource allocation.From a viewpoint of business practice,the frequency of corporate acquisition activity has been growing,with more and more listed firms relying on acquisition for extensive growth and market value management.But there is lack of literature investigating what drives firms to make acquisition investment from a macro perspective.Therefore,based on unique institutional background in China,we relate economic policy uncertainty to corporate acquisition investment organically,attempting to investigate whether economics policy uncertainty has an important effect on corporate acquisition investment,which can help us understand the effect of economic policy uncertainty from the perspective of corporate acquisition and identifying macro determinants of corporate acquisition.Although scholars have conducted massive research related to economic policy uncertainty,they don't draw a consistent conclusion about the effect direction and working channel of economic policy uncertainty.Moreover,they hold totally opposite opinion.For instance,some scholars find that economic policy uncertainty has a negative effect on corporate R&D investment,whereas other scholars find that economic policy uncertainty has a positive effect on corporate R&D investment.This contradictory is also suited for the relationship between economic policy uncertainty and corporate acquisition behavior,that is,the effect of economic policy uncertainty on corporate acquisition behavior ex ante is unsure.According to the extant theory and studies concerned with economic policy uncertainty,we analyze and put forward our theory as follows.On one hand,economic policy uncertainty has a negative effect on corporate acquisition through the lens of real option,effect financing cost of acquisition,and the fluency of acquisition financing.However,on the other hand,high economic policy uncertainty also means more buyout opportunity,and the increase in economic policy uncertainty can boost the potential benefit of successful acquisition,which indicates that economic policy uncertainty can contribute to corporate acquisition.Except for studying the effect of overall economic policy uncertainty,we classify economic policy uncertainty into more specific categories and investigate whether the effect of fiscal policy uncertainty,monetary policy uncertainty,trade policy uncertainty,and exchange and capital control policy uncertainty on corporate acquisitions separately is heterogenous,which also contributes to the robustness of our main findings.Furthermore,the sensitivity of corporate acquisition behavior to economic policy uncertainty varies to the attributes of firms themselves and characteristics of external environment.Therefore,in order to verify the boundary in which economic policy uncertainty affects corporate acquisition and find out how it translates into corporate acquisitions,we introduce three contextual variables,which is highly relevant for Chinese firms,that is firm property ownership,the degree of financial constraint,and regional financial development,investigating whether they moderate the relationship between economic policy uncertainty and corporate acquisitions.In order to investigate our hypothesis empirically,we use non-financial firms in Chinese A-share stock market between 2007 and 2017 as research sample and nonlinear panel model,that is panel probit model,as our main econometric tool,thoroughly investigating the aforementioned relationship between economic policy uncertainty and corporate acquisitions.The main findings are showed as follows.First of all,we demonstrate that economic policy uncertainty has a statistically significantly negative effect on corporate acquisition,rather than the supposed positive effect.Specifically,100 points increase in economic policy uncertainty is associated with 2%decrease in the probability of corporate acquisition,which is equal to 11.92%of the average probability of corporate acquisition for sampled firms.Secondly,the effect of economic policy uncertainty on corporate acquisition doesn't remain unchanged.Specifically,firm property ownership positively moderates the relationship between economic policy uncertainty and corporate acquisition.When firms are state-owned,the negative relationship between economic policy uncertainty and corporate acquisition becomes weaker.And the degree of financial constraint will strengthen the negative relationship between economic policy uncertainty and corporate acquisition.In other words,when the degree of financial constraint goes up,the negative relationship between economic policy uncertainty and corporate acquisition becomes stronger.However,we don't find that regional financial development has a statistically significant effect on corporate acquisition.Finally,the results show that different types of economic policy uncertainty have heterogenous effect on corporate acquisition.In summary,fiscal policy uncertainty,exchange and capital control policy uncertainty,and monetary policy uncertainty has more significantly negative effect on corporate acquisitions.But we don't find a significant relationship between trade policy uncertainty and corporate acquisition.Based on above study,we not only make important theoretical contributions to extant literature,but also have meaningful implications for firms and policymakers,which is shown as follows.Firstly,we extend the study concerning the effect of economic policy uncertainty,further verifying the direction and the boundary of the economic effect of economic policy uncertainty,which is helpful to form deep understanding about economic policy uncertainty.Based on Chinese unique context,we explore the effect of economic policy uncertainty on corporate acquisitions and elaborate on the positive and negative channels through which economic policy uncertainty influences corporate acquisitions.Also,we classify economic policy uncertainty into more specific categories,and innovatively investigate the effect of more specific economic policy uncertainty on corporate acquisitions.Secondly,the extant literature related to the determinants of corporate acquisition mainly utilize agency theory,behavioral theory,and combined synergy and other micro-level theories and focus on studying the effect of management-and firm-level variables on corporate acquisition.Through the lens of economic policy uncertainty,we investigate the relationship between economic policy uncertainty and corporate acquisition,which further extend the research about determinants of corporate acquisition from the macro level.Thirdly,we don't care about economic policy itself,but about the volatility of economic policy.We study the effect of economic policy uncertainty on corporate acquisition.Also,we elaborate on the mechanisms through which economic policy uncertainty influences corporate acquisition.Therefore,our study enrich the literature relating economic policy to firm behavior.Finally,our study provides beneficial guidance about how to make firm acquisition decisions or prepare for difficulty time when economic policy uncertainty is high.Also,our study has meaningful implications for policymakers.Policymakers are supposed to refraining from too much and dramatical policy adjustment,improve the consistency and fluency of economic policy.Also,policymakers should help capital market and firms form reasonable expectations,thereby mitigating the negative effect of economic policy uncertainty.