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

Ran Duchin | Abed El Karim Farrouhk | Jarrad Harford | Tarun Patel

Jun 5, 2025

Key Takeaways

This study investigates the economic consequences of political polarization, focusing on the role of political differences between merging firms in the U.S. mergers and acquisitions (M&As)
As political polarization in the U.S. increased, the frequency of M&As between politically divergent firms and between firms from politically divergent states decreased, as did the average political divergence between acquirers and targets.
Political divergence between acquirers and targets reduces the likelihood of deal announcement, particularly during periods of heightened political polarization and when firms emphasize post-merger integration.
Economic recessions mitigate the effect of political divergence on merger likelihood, because political polarization tends to be lower during such periods, and companies are more likely to merge out of “necessity,” putting aside political differences.
Overall, the findings show political polarization affects the allocation of assets in the real asset market. They point to integration costs resulting from affective polarization across workforces as a key mechanism underlying the matching between acquirers and targets in the M&A market.

Source Publication:

Duchin, Ran, Abed El Karim Farroukh, Jarrad Harford, and Tarun Patel, 2023, “The Economic Effects of Political Polarization: Evidence from the Real Asset Market.” SSRN Working Paper

Background and Research Questions

A defining feature of 21st-century American politics is the rise of political polarization. Whereas prior research explores the economic determinants of polarization, this paper investigates its economic consequences, focusing on the role of political divergence between acquirers and targets in influencing the formation and outcomes of M&As.

Data and Methodology

The authors assemble a novel dataset combining M&A deals involving publicly listed U.S. firms from 1985 to 2019, using employee campaign contributions, voter registration records, and LinkedIn employment data. M&A data are from the Thomson Reuters SDC Platinum database; campaign contributions are sourced from the Federal Election Commission (FEC); voter registration records are obtained through disclosure requests with each state’s Department of State; and LinkedIn data on individuals’ employment and education come from Revelio Labs. Political divergence, our main variable of interest, is measured as the absolute difference in partisan leaning between the acquirer and target, based on employees’ political donations and voter registration records. Key empirical approaches include analyzing aggregate trends in political divergence over time and employing conditional logit regressions on matched firm pairs to estimate the likelihood of deal formation.

Findings and Discussion

The key findings indicate the rise in political polarization has had considerable consequences for the landscape of M&As in the U.S. The prevalence of M&As between politically divergent firms has been declining. By 2019, only 6% of deals involved extremely divergent firms, down from over 11% before 2010. This trend corresponds to the decline in average political divergence between acquirers and targets, as well as the decrease in M&As between firms from politically different states.

Figure 1 Average Political Divergence in Announced Deals over Time

Note: This figure plots the 10-year moving average of political divergence between the acquirer and target in merger announcements through time. We calculate political divergence as the absolute value of the difference between the acquirer’s and target’s Democratic affiliation. We calculate democratic affiliation as the number of employee donations made to Democratic-affiliated committees over the number of donations made to Democrat- and Republican-affiliated committees. The sample comprises 2,262 merger announcements from 1985–2019.

Deal-level analysis shows greater political divergence corresponds to a lower likelihood of a future merger announcement. An increase of one standard deviation in political divergence reduces merger likelihood by 0.6 to 1.3 percentage points. This finding holds after controlling for geographic distance, product similarity, and other corporate culture measures. The effect of political divergence on merger likelihood is stronger when aggregate affective polarization is more pronounced. Post-merger integration costs driven by affective polarization—specifically, the distrust or dislike of those from opposing political parties—appear to be a key mechanism. The negative relation between political divergence and the likelihood of a merger is significant only for firms that emphasize integration in post-merger filings.

Implications

The findings provide some of the first evidence on the real economic effects of the rise in political polarization. The observed decline in politically divergent mergers represents a structural shift in the real asset market for M&As. As political polarization has increased nationally, the importance of political similarity in M&A deals has risen. The increasing importance of political similarity in a polarized environment suggests that even within a country, trust among those with different political views is a significant factor in fostering economic exchange. Overall, these insights are relevant for understanding how societal polarization can influence corporate strategies and market efficiency.