The influence of fiscal policy on VS aggregate merger activity

Abstract

In recent years, aggregate merger (M&A) activity has fluctuated substantially throughout the world. This paper contributes to the literature by examining the influence of fiscal policy on M&A activity. M&A activity is measured by three different variables, namely: quarterly deal frequency, quarterly deal value and a relative measure which is defined by taking the ratio of the deal value to the S&P 500. A distinction is made between total M&A, inward M&A and outward M&A, since fiscal policy could have a different impact on different streams. Fiscal policy is utilized by two variables, namely government debt as a percentage of GDP and government expenditures. Before testing the hypothesized relationships, Augmented Dickey Fuller (ADF) tests and Engle Granger Co-integration tests are employed in order to examine whether the variables are stationary or co-integrated. The relationship between fiscal policy and M&A activity is measured by performing an Error Correction Model (ECM), since the tests clarify that some of the variables are non-stationary, though co-integrated. The regression results show that government debt has a significant negative effect on M&A activity, whereas government size has a positive influence on all M&A activity streams. Additional robustness tests also confirm these relationships.