Exchange rate effects in cross-border acquisitions

Abstract: This paper studies the impact of exchange rates on target shareholder’s wealth gains in 250 cross-border takeovers. A majority of the takeovers in the study do not occur when the acquirer’s exchange rate is relatively strong and when they do, the impact it has on the wealth gains to targets is inconclusive. Previous studies document a positive relationship between a bidder’s strong exchange rate and wealth gains to target shareholders. We provide evidence showing that a wide definition of when an exchange rate is strong increases the gains to the targets but are unable to confirm this relationship with narrower definitions. Our results therefore prohibit us to exclude the possibility that exchange rates have an impact in cross-border takeovers. However, if the informational asymmetries in cross-border takeovers have decreased it is likely that imperfections and costs in product or factor markets and biases in government and regulatory policies play a more prevalent role in determining the target’s shareholders wealth gains today.