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

Zhon Chen, Bo Han and Yeqin Zeng ()
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Zhon 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

ICMA Centre Discussion Papers in Finance from 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.

Keywords: Cross-border M&As; Financial Risk Management; DerivativesHandle: RePEc:rdg:icmadp:icma-dp2015-04 (search for similar items in EconPapers)
JEL-codes: F31 G13 G32 G34 (search for similar items in EconPapers)
Date: 2015-04
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