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

Author

Listed:
  • Zhong Chen

    (ICMA Centre, Henley Business School, University of Reading)

  • Bo Han

    (College of Business, Central Washington University)

  • Yeqin Zeng

    (ICMA Centre, Henley Business School, University of Reading)

Abstract

We study the effect of financial hedging on firm performance with a sample of 1, 369 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-sized acquirer. Related to the CAR improvement, acquirers with financial hedging programs also have lower implied stock volatilities and higher deal completion probabilities than those without such programs. In addition, financial hedging reduces acquirers' waiting costs, allowing the longer negotiation time between acquirers and targets. Finally, we find that financial hedging has a long-term effect on acquirer firm value such that derivatives users have better post deal long-run performance than non-users. Overall, our findings provide new insights on a link between corporate financial hedging and investment decisions.

Suggested Citation

  • Zhong Chen & Bo Han & Yeqin Zeng, 2015. "Does Corporate Financial Risk Management Add Value? Evidence from Cross-Border Mergers and Acquisitions," ICMA Centre Discussion Papers in Finance icma-dp2015-04, Henley Business School, University of Reading.
    • Handle: RePEc:rdg:icmadp:icma-dp2015-04
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    More about this item

    Keywords

    Cross-border M&As; Financial Risk Management; DerivativesHandle: RePEc:rdg:icmadp:icma-dp2015-04;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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