The Politics of M&A Antitrust

• Date: 01 March 2020
• DOI: http://doi.org/10.1111/1475-679X.12291
• Author: SURAJ SRINIVASAN,WANLI ZHAO,MIHIR N. MEHTA
• Published date: 01 March 2020

DOI: 10.1111/1475-679X.12291

Journal of Accounting Research

Vol. 58 No. 1 March 2020

Printed in U.S.A.

The Politics of M&A Antitrust

MIHIR N. MEHTA,

∗SURAJ SRINIVASAN,

†AND WANLI ZHAO

‡

Received 20 October 2017; accepted 2 October 2019

ABSTRACT

Antitrust regulators play a critical role in protecting market competition.

We examine whether the political process affects antitrust reviews of merger

transactions. We find that acquirers and targets located in the political dis-

tricts of powerful U.S. congressional members who serve on committees with

antitrust regulatory oversight receive relatively favorable antitrust review out-

comes. To establish causality, we use plausibly exogenous shocks to firm–

politician links and a falsification test. Additional findings suggest congres-

sional members’ incentives to influence antitrust reviews are affected by three

channels: special interests, voter and constituent interests, and ideology. In

∗University of Michigan; †Harvard University; ‡Renmin University of China.

Accepted by Douglas Skinner. We thank an anonymous referee for comments that have

greatly improved this manuscript and acknowledge comments by Anna Costello, Mara Fac-

cio (discussant), Jiekun Huang, Christian Leuz, Hamid Mehran, Randall Morck, Greg Miller,

Gordon Phillips (discussant), Christopher Polk, Uday Rajan, Sudi Sudarsanam (discussant),

Gary Tian (discussant), Stefan Zeume, Luigi Zingales, and antitrust economists and lawyers

at the U.S. Department of Justice who wish to remain anonymous. We have also benefited

from comments by workshop participants at Harvard University, University of Michigan, Mas-

sachusetts Institute of Technology, Ohio State University, Renmin University of China, Uni-

versity of Texas at Arlington, University of Texas at Dallas, and conference participants at

the University of Chicago Stigler Center 2017 Conference on Political Economy, the 2017

Western Finance Association Annual Meeting, the 2017 China International Conference in

Finance, and the City University of London 2017 CASS Mergers and Acquisitions Research

Center Conference. Matthew Clark, Fatima Farhat, Neeraj Goyal, Haley Howell, Brenna Mo-

her, and Maddy Thompson provided excellent research assistance. We thank Charles Stew-

art III for congressional committee data, Diego Garcia and Øyvind Norli for 10-K business

operations data, and Adam Aiken, Jesse Ellis, and Minjeong Kang for politician stock own-

ership data. This manuscript was previously circulated under the title “Political Influence

and Merger Antitrust Reviews”. An online appendix to this paper can be downloaded at

http://research.chicagobooth.edu/arc/journal-of-accounting-research/online-supplements.

5

CUniversity of Chicago on behalf of the Accounting Research Center, 2019

6M.N.MEHTA,S.SRINIVASAN,AND W.ZHAO

aggregate, our findings suggest that the political process adversely interferes

with the ability of antitrust regulators to provide independent recommenda-

tions about anticompetitive mergers.

JEL codes: D72; G34; G38; K21

Keywords: political economy; antitrust; FTC; DOJ; Senate Committee on

the Judiciary; House Judiciary Committee; mergers and acquisitions

1. Introduction

A large body of research examines the causes and consequences of merg-

ers. Despite the breadth of this research, relatively little is known about how

firms manage the merger antitrust review process. In the United States,

overcoming antitrust regulatory scrutiny is a critical hurdle to consum-

mate any economically significant merger. We offer new evidence about

the merger antitrust process in the United States and in particular, how the

political process can influence merger antitrust review outcomes.

We take advantage of the fact that some acquirers and/or targets are lo-

cated in the political districts of House Representatives and Senators who

sit on the committees charged with oversight of U.S. antitrust regulators:

the House Judiciary Committee and the Senate Committee on the Judi-

ciary (hereafter “judiciary committees”).1This allows us to use plausibly

exogenous shocks to firm–politician links to offer causal evidence.

Judiciary committee members have both the ability and motivation to in-

fluence merger antitrust review outcomes. According to congressional con-

trol theory, the relationship between Congress and regulatory agencies is a

principal-agent problem and the ability of politicians to influence regula-

tors occurs via various monitoring and disciplining mechanisms (Weingast

and Moran [1983], Weingast [1984]). Under the theory, politicians can in-

fluence a regulatory agency (under their jurisdiction) by threatening to

reduce the agency’s budgetary appropriation recommendations, by hold-

ing congressional hearings, and/or by threatening to replace the agency’s

leadership (Shotts and Wiseman [2010]).2

Judiciary committee members have several incentives to influence

merger antitrust reviews. Special interest groups (e.g., acquirers or targets)

can influence committee members, consistent with capture theory (Stigler

1In contrast, politicians serving on other committees have limited ability to influence regu-

lators outside their purview. We discuss this issue more in robustness tests discussed below.

2Judiciary committee members’ efforts to influence antitrust regulators to approve a

merger likely occur through unobservable back channels because they want to limit possi-

ble backlash if a merger results in adverse effects for their constituents, such as job losses or

reduced choice and/or higher prices for goods and services. Accordingly, researchers have

limited ability to document exactly how and when politicians influence antitrust regulators.

However, prior empirical evidence supports the notion that congressional committees influ-

ence regulator actions (e.g., Faith, Leavens, and Tollison[1982], Weingast and Moran [1983],

Hunter and Nelson [1995]).

THE POLITICS OF M&A ANTITRUST 7

[1971], Laffont and Tirole [1991]). Also, politician ideology and personal

wealth concerns can affect a committee member’s support for a merger.

It is not obvious ex ante that congressional members can opportunis-

tically influence merger antitrust review outcomes. First, the merger an-

titrust review process is highly technical and regulators employ specialist

lawyers and economists, who obtain detailed confidential information from

the merger parties and conduct extensive economic analyses to evaluate

the competitive consequences of the merger.Second, electoral competition

theory (Mayhew [1974], Fenno [1978]) posits that congressional members

can have reelection-related incentives to pressure antitrust regulators to re-

ject mergers that could result in job losses (Dessaint, Golubov, and Volpin

[2017]) or higher prices for goods and services in their districts because

of reduced market competition (Geraldi and Shapiro [2009]). Given these

competing effects, the net effect of the political process on merger antitrust

outcomes is an empirical question.

We examine a sample of mergers in the United States between 1998 and

2016, and find that antitrust review outcomes of anticompetitive mergers

are systematically more favorable for merger parties in the political districts

of members serving on judiciary committees. The effects of political links

are most pronounced in the subset of mergers that are most likely to be

contested by antitrust regulators because of possible anticompetitive con-

cerns and are therefore more likely to benefit from political interference.

When acquirers have judiciary committee representation, the antitrust re-

view results in fewer regulatory obstacles and the review is completed faster.

In contrast, when targets have judiciary committee representation, antitrust

reviews take longer and are more likely to include regulatory obstacles.3A

one-standard-deviation increase in the seniority of an acquirer’s (target’s)

judiciary committee representation is associated with a 9.8% (7.2%) in-

crease (decrease) in the probability that an anticompetitive merger receives

an early termination decision, relative to other review outcomes, and a 3.5%

decrease (2.6% increase) in the length of the review duration, or 5.1 days

(3.6 days), respectively.

We address causality in several ways. First, our results are robust to the in-

clusion of state and industry fixed effects to remove any time-invariant state

or industry-specific characteristics. Second, difference-in-differences tests

show that antitrust merger review outcomes are less favorable for merger

parties that experience plausibly exogenous losses in judiciary committee

representation, relative to other merger parties. Third, a falsification test

shows that our results are unlikely to be attributable to characteristics that

3Further analyses discussed in section 6 indicate that the positive relation between judiciary

committee representation for targets and merger antitrust hurdles is consistent with capture

theory rather than because of politician concerns about adverse effects of the takeover on

local-area employment.