Contents lists available at ScienceDirect Pacific-Basin Finance Journal journal homepage: www.elsevier.com/locate/pacfin Government-affiliation, bilateral political relations and cross- border mergers: Evidence from China Wenjia Zhang a , Nathan Mauck b, ⁎ a School of International Economics, China Foreign Affairs University, No. 24, Zhanlan Road, Xicheng District, Beijing 100037, China b Henry W. Bloch School of Management, University of Missouri - Kansas City, 5100 Cherry Street, Kansas City, Missouri 64110, USA ARTICLE INFO Keywords: Government ownership Political connections Bilateral political relations Cross-border mergers ABSTRACT This paper examines the relation between government-affiliated ownership, bilateral political relations, and cross-border mergers. Using a sample of 219 cross-border mergers conducted by Chinese listed companies from 2000 to 2013 we document three main results. First, we find that government-affiliated bidder (i.e., those with political connections and/or government owner- ship) abnormal returns do not differ from non-affiliated bidders in the announcement period after controlling for deal characteristics. However, longer-term post-merger bidder abnormal returns are lower for government-affiliated bidders, consistent with the general inefficiency associated with government-affiliation. Second, our results indicate that improving bilateral political rela- tions between China and target nations are positively associated with both short and long-term bidder performance, indicating a role for economic nationalism in firm outcomes. Third, we find that the interaction between government-affiliation and change in political relations is generally unrelated to bidder performance. However, in target nations with relatively low political risk, the interaction between government-affiliation and change in political relations is positively related to longer-term bidder performance. Thus, government-affiliation can be value enhancing in certain cases. 1. Introduction Cross-border mergers and acquisitions require that target nations permit foreign buyers. While cross-border mergers are often successfully completed, Dinc and Erel (2013) document “economic nationalism” in which target nation governments prefer firms to remain domestically owned. Bertrand et al. (2016) note that host governments may interfere in cross-border merger negotiations. After deal completion, host government intervention may negatively influence bidder outcomes. Further, the literature notes that host nation government preferences differ based on the characteristics of the acquiring nation – including the form of government and the political affinity between nations. Nationalistic responses to cross-border M&A are linked to economic consequences in- cluding deterring foreign bidders from bidding in the future and higher required bidder premiums. In the context of economic nationalism from the host country, we examine two dimensions through which cross-border M&A may be influenced from the bidder perspective. The first relates to the ownership structure of the firm itself. In particular, while any firm may find that cross-border merger plans hinge on the respective governments, such a reliance may be different for government- affiliated bidder firms. In particular, it may be that economic nationalism is stronger in the case of government-affiliated bidder firms. If foreign private ownership is deemed sub-optimal, then foreign government ownership may be deemed even less preferable. Black https://doi.org/10.1016/j.pacfin.2018.07.003 Received 18 January 2018; Received in revised form 22 June 2018; Accepted 9 July 2018 ⁎ Corresponding author. E-mail address: mauckna@umkc.edu (N. Mauck). Pacific-Basin Finance Journal 51 (2018) 220–250 0927-538X/ © 2018 Elsevier B.V. All rights reserved. T