The Economic Effects of Political Polarization: Evidence from the Real Asset Market

Abstract

Politically divergent firms are considerably less likely to merge. This effect concentrates in years with high political polarization, and when firms plan to integrate their operations. The results hold after including industry-by-year and deal fixed effects, and controlling for geographical distance, product similarity, and nonpolitical differences in corporate culture or ESG policies. Following politically divergent mergers, employee turnover is higher, particularly of employees whose views misalign with the merger partner. Overall, the rise in political polarization changed the landscape of the real asset market in the U.S., with fewer mergers between politically divergent firms or firms from politically divergent states.