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Foreign Currency Exposure and Hedging: Evidence from Foreign Acquisitions

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  • Bartram, Söhnke M.
  • Burns, Natasha
  • Helwege, Jean

Abstract

Previous research on the impact of currency risk on stock returns has failed to find a significant role for foreign exchange rates. This paper addresses several explanations of this finding with a unique dataset of U.S. firms that acquire targets in other countries. The dataset allows estimation of the impact of exchange rates using firm-specific bilateral exchange rates and a time period over which underlying exposure is known to significantly change. We also relate the change in exposure from before to after the acquisition to various characteristics of the acquirer, such as its presence in the target country prior to the deal and its hedging activities, and characteristics of the target, such as the exposure of the target prior to the deal. The results suggest that identifying a relevant exchange rate can be an important consideration in studying the impact of exchange rate risk on stock returns, but identifying financial hedging information is not. Further, foreign targets often provide operational hedging benefits to the U.S. acquirers, as exposure estimates are significantly affected by the acquisition.

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File URL: http://mpra.ub.uni-muenchen.de/13061/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10122.

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Date of creation: 01 Apr 2007
Date of revision: 21 Aug 2008
Handle: RePEc:pra:mprapa:10122

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Keywords: Exchange rates; exposure; hedging; derivatives; mergers; acquisitions;

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References

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  1. Bartram, Söhnke M., 2008. "What lies beneath: Foreign exchange rate exposure, hedging and cash flows," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1508-1521, August.
  2. Jia He & Lilian K. Ng, 1998. "The Foreign Exchange Exposure of Japanese Multinational Corporations," Journal of Finance, American Finance Association, vol. 53(2), pages 733-753, 04.
  3. John M. Griffin & Rene M. Stulz, 1997. "International Competition and Exchange Rate Shocks: A Cross-Country Industry Analysis of Stock Returns," NBER Working Papers 6243, National Bureau of Economic Research, Inc.
  4. Jorion, Philippe, 1990. "The Exchange-Rate Exposure of U.S. Multinationals," The Journal of Business, University of Chicago Press, vol. 63(3), pages 331-45, July.
  5. Geczy, Christopher & Minton, Bernadette A & Schrand, Catherine, 1997. " Why Firms Use Currency Derivatives," Journal of Finance, American Finance Association, vol. 52(4), pages 1323-54, September.
  6. Sohnke M. Bartram & G. Andrew Karolyi, 2002. "The Impact of the Introduction of the Euro on Foreign Exchange Rate Risk Exposures," Finance 0207005, EconWPA, revised 16 Sep 2002.
  7. Kent D Miller & Jeffrey J Reuer, 1998. "Firm Strategy and Economic Exposure to Foreign Exchange Rate Movements," Journal of International Business Studies, Palgrave Macmillan, vol. 29(3), pages 493-513, September.
  8. Bartram, Söhnke M. & Bodnar, Gordon, 2005. "The Exchange Rate Exposure Puzzle," MPRA Paper 6482, University Library of Munich, Germany.
  9. Bartram, Sohnke M. & Bodnar, Gordon M., 2006. "Crossing the Lines: The Conditional Relation between Exchange Rate Exposure and Stock Returns in Emerging and Developed Markets," MPRA Paper 13064, University Library of Munich, Germany, revised 02 Nov 2008.
  10. Brown, Gregory W., 2001. "Managing foreign exchange risk with derivatives," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 401-448, May.
  11. Bodnar, Gordon M. & Gentry, William M., 1993. "Exchange rate exposure and industry characteristics: evidence from Canada, Japan, and the USA," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 29-45, February.
  12. Williamson, Rohan, 2001. "Exchange rate exposure and competition: evidence from the automotive industry," Journal of Financial Economics, Elsevier, vol. 59(3), pages 441-475, March.
  13. Kathryn M.E Dominguez & Linda L. Tesar, 2000. "Trade and Exposure," Working Papers 466, Research Seminar in International Economics, University of Michigan.
  14. Bartram, Sohnke M., 2004. "Linear and nonlinear foreign exchange rate exposures of German nonfinancial corporations," Journal of International Money and Finance, Elsevier, vol. 23(4), pages 673-699, June.
  15. Bartov, Eli & Bodnar, Gordon M. & Kaul, Aditya, 1996. "Exchange rate variability and the riskiness of U.S. multinational firms: Evidence from the breakdown of the Bretton Woods system," Journal of Financial Economics, Elsevier, vol. 42(1), pages 105-132, September.
  16. Bartram, Sohnke M. & Dufey, Gunter & Frenkel, Michael R., 2005. "A primer on the exposure of non-financial corporations to foreign exchange rate risk," Journal of Multinational Financial Management, Elsevier, vol. 15(4-5), pages 394-413, October.
  17. Doidge, Craig & Griffin, John & Williamson, Rohan, 2006. "Measuring the economic importance of exchange rate exposure," Journal of Empirical Finance, Elsevier, vol. 13(4-5), pages 550-576, October.
  18. Bartram, Söhnke M. & Brown, Gregory W. & Minton, Bernadette, 2009. "Resolving the Exposure Puzzle: The Many Facets of Exchange Rate Exposure," MPRA Paper 14041, University Library of Munich, Germany.
  19. Francis, Bill B. & Hasan, Iftekhar & Hunter, Delroy M., 2008. "Can hedging tell the full story? Reconciling differences in United States aggregate- and industry-level exchange rate risk premium," Journal of Financial Economics, Elsevier, vol. 90(2), pages 169-196, November.
  20. Martin Glaum & Marko Brunner & Holger Himmel, 2000. "The DAX and the Dollar: The Economic Exchange Rate Exposure of German Corporations," Journal of International Business Studies, Palgrave Macmillan, vol. 31(4), pages 715-724, December.
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Cited by:
  1. Bartram, Söhnke M. & Bodnar, Gordon M., 2006. "Crossing the Lines: The Conditional Relation between Exchange Rate Exposure and Stock Returns in Emerging and Developed Markets," MPRA Paper 14018, University Library of Munich, Germany, revised 02 Nov 2008.

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