At a time when capital has never been more mobile and available, financial protectionism is on the rise. “Economic nationalism is sweeping the globe,” notes Professor Darius Miller. “Sometimes the rationale of national security is valid, and sometimes it’s an excuse to thwart mergers. You might think it’s good for national security but what are the costs?” In a new paper, Miller and co-authors reveal the important consequences of government-related incursions in deals between foreign and domestic companies.

Foreign investors generate 15 percent of all U.S. mergers and acquisitions (M&A) activity by deal value, notes the research. In 2016 alone, foreign acquisitions of U.S. companies exceeded $500 billion, according to a research database. U.S. regulators passed the Foreign Investment and National Security Act of 2007, or FINSA, after public concern about record amounts of cross-border M&A activity. Previously, foreign deals under scrutiny were one-offs, but now the government has ratcheted up its activity. The protectionism is formalized into law.

“There may be good reasons for China to not own part of an American aerospace firm. But if you’re a shareholder with retirement dollars, it clearly hurts you financially.”

“There is a long history of U.S. financial protectionism, but with little impact on thwarting acquisitions,” says Miller. However, FINSA has had a dramatic and chilling impact, he suggests. “There was a significant drop in the number of acquisitions before and after FINSA,” he says. “There may be good reasons for China to not own part of an American aerospace firm. But if you’re a shareholder with retirement dollars, it clearly hurts you financially.”

The study is a first about the economic impact of specific legislation that formalizes U.S. government jurisdiction over foreign M&A activity. Foreign takeovers of firms affected by FINSA declined 68 percent. Some industries affected include advanced materials and processing, chemicals,information technology, telecommunications, biotechnology, energy, space systems and marine systems. “At least eleven major countries accounting for 40 percent of global foreign direct investment have adopted or are considering the adoption of FINSA-type laws,” according to the authors.

The loss of shareholder wealth is a key finding of the paper. The study shows that firms lost 1.12 to 2.15 percent of their value on average. The d ecrease amounted to roughly $24.9 billion to $47.9 billion in lost value for FINSA-affected firms over one three-day window.

Is this legislative and extra-regulatory activity justified? Miller answers, “Some of it is just sentiment around the globe. Some of it is just that people don’t like foreign companies buying their domestic institutions.”

“Financial Protectionism, M&A Activity, and Shareholder Wealth” with David Godsell and Ugur Lel is under review.