Political Attitudes, Partisanship, and Polarization: Effects on Mergers and Acquisitions

By | January 22, 2020

Courtesy of Ran Duchin, Jarrard Harford, Abed el Karim Farroukh, and Tarun Patel

Anecdotal evidence, academic research, and articles in the popular press show that political views can influence a wide array of personal decisions, including the choice of marital (or cohabiting) partners and brand consumption. In our recent paper, we investigate the effects of political views on business, rather than personal, decisions, focusing on mergers and acquisitions. These decisions are among the most important decisions made by firms, with real consequences for economic sectors and the overall allocation of assets in the economy.

Our empirical analyses consider both the matching between acquirers and targets, and the outcomes of consummated mergers and acquisitions. Rather than focusing on firms’ direct political dealings with regulators, we consider the role of political differences between potential acquirers and targets, which can result in differences between the overall corporate cultures. To measure political differences across firms, we hand-collect detailed data on the personal contributions of corporate employees to political campaigns from 1980 to 2018. These data include a total of nearly one million contributions, from more than 300,000 employees in roughly 9,000 firms. Using these data, we measure a firm’s political attitude as the ratio between the total number of employee contributions to Democratic campaigns and the total number of contributions to both Democratic and Republican campaigns. Exxon employees, for instance, predominantly donate to, and are affiliated with, the Republican Party. Bristol-Myers Squibb employees, on the other hand, are primarily affiliated with the Democratic Party. Based on these measures, we construct a pairwise measure of the political distance between any two firms. To address concerns that the matching between firms and employees is correlated with merger decisions or outcomes, we also construct a similar measure of a firm’s political attitude based on all personal contributions originating from the zip-code of the firm’s headquarters. These data include a total of more than 3.5 million contributions linked to roughly 12,500 firms. Using these estimates, we construct an alternative pairwise measure of the political distance between any two firms.

Our study aims to answer three main research questions: (1) how does the political difference or similarity between two firms affect the likelihood that they merge in the future, (2) what are the implications of cross-firm political differences for merger negotiations, merger announcement returns, and post-integration real outcomes, and (3) how do changes in the level of the political polarization in the U.S. over time affect the role of political attitudes and partisanship in mergers and acquisitions?


To answer these questions, our paper provides several analyses. In the first set of analyses, we investigate the effect of the political distance between firms on the likelihood of a merger. We find that greater political distance between firms decreases the likelihood of a merger announcement. The estimates are important both economically and statistically; cannot be explained by factors such as geographic proximity, acquirer/target characteristics, industry, or size; and do not change if campaign contributions are measured at the employee or at the zip-code level.Collectively, the findings suggest that political homogeneity across firms is a strong predictor of future mergers.

In the second set of analyses, we investigate the implications of the political distance between acquirers and targets in announced deals. First, we find that announced deals are more likely to complete when the acquirer and the target are similar. Furthermore, for completed deals, the time to completion is shorter when political distance is lower. These effects imply that the political differences between acquirers and targets play a role during merger negotiations.Third, we investigate the effects of the political distance between acquirers and targets on post- merger performance in completed deals. We find that in the years following a merger completion, both Return on Assets (ROA) and Return on Equity (ROE) are lower when the political distance is greater. We also find that 3-year buy-and-hold abnormal cumulative returns[1], a measure of longer-term performance, are lower when political distance is higher. These findings indicate that political differences between the acquirer and the target are an obstacle to post-merger integration, with negative consequences for merger negotiations, performance, and value.

In the third set of analyses, we investigate the effect of political polarization. We conjecture that the effect of the political difference between acquirers and targets is stronger when the political divide in the country is more pronounced. These analyses are motivated by the observation that in recent years, the political climate in the United States has been substantially more polarized along party lines. For the decade 2010-2019, the average Political Conflict Index[2] was 24% greater than it was in the previous decade. Hence, to determine the effect of political polarization, we re-estimate the effects separately over earlier and later sample periods. The estimates show that the effects of political partisanship on merger likelihood are stronger in more recent sample years, i.e., polarization exacerbates the effect of political attitudes on merger activity. 


Our findings provide new evidence that differences in political attitudes between firms have important implications for the formation, negotiation, and performance of mergers and acquisitions. We also find that political polarization decreases the likelihood of mergers and acquisitions among politically distant firms. As such, our paper shows that political attitudes and polarization have important consequences for the allocation of resources in the economy. The magnitude of the effects suggests that unlike other social or cultural divides—where group-related attitudes are constrained by social norms—there are no corresponding pressures to temper disapproval of political opponents. Hence, the effects of political partisanship likely are stronger than those of other corporate cultural differences.


[1]For further explanation of abnormal return, see: https://www.investopedia.com/terms/a/abnormalreturn.asp

[2]The Political Conflict Index is measured by the Reserve Bank of Philadelphia. Available at: https://www.philadelphiafed.org/research-and-data/real-time-center/partisan-conflict-index.

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