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Does Corporate Financial Risk Management Add Value? Evidence from Cross-Border Mergers and Acquisitions

We study the effect of financial hedging on firm performance, using a sample of 1369 cross-border mergers and acquisitions (M&As) initiated by S&P 1500 firms between 2000 and 2014. Our results show that derivatives users have higher acquirer cumulative abnormal returns (CARs) around deal announcements than non-users, which translates into a $174.3 million shareholder gain for an average acquirer. The possible explanations of the CAR improvement are the lower stock return volatility and higher deal completion probability. Furthermore financial hedging can lower acquirers' waiting costs, offering longer time for acquirers to negotiate with targets. At last, these short-run improvements have a permanent effect on firm value such that derivatives users have better long-run performance than non-users after cross-border deal completion. Overall our findings provide new insights on a link between financial hedging and corporate investment decisions.

Published on 1st May 2015
Authors Zong Chen, Bo Han, Yeqin Zeng
Series Reference ICM-2015-04