Foreign Currency Exposure and Hedging:

Evidence from Foreign Acquisitions

Shnke M. Bartram , Natasha Burns + and Jean Helwege **

December 2010

Abstract
While theoretical research suggests that many firms should have significant exchange rate exposure,
empirical research has documented a low stock price reaction to exchange rate movements. Against
this backdrop, this paper examines a sample of U.S. firms that engage in large acquisitions abroad,
entailing that exchange rate risk with regards to the currency of the target country is relevant for the
sample firms around the time of the deal. Despite strong priors, the stock returns of the sample firms
show empirically surprisingly little exchange rate exposure before or after the transaction. However,
despite the fact that individual time-series estimates of currency exposure are frequently not statistically significant, the results show that they are still economically meaningful and significantly different from zero on average. While the propensity to use derivatives in the target currency increases with the size of the target firm, the use of derivatives or foreign currency debt overall does not seem to play much of role in managing currency risk in the context of foreign acquisitions. In contrast, there is evidence consistent with the foreign target firms providing operational
hedging benefits to the acquiring firms that reduce the impact of exchange rate risk on their stock
returns.
Keywords: Foreign exchange, hedging, derivatives, acquisitions
JEL Codes: G3, F4, F3

Lancaster University and SSgA, Management School, Lancaster LA1 4YX, United Kingdom, phone: +44 (1524)
592 083, fax: +1 (425) 952 10 70, email: <s.m.bartram@lancaster.ac.uk>, internet: <http://www.lancs.ac.uk/staff/
bartras1/>.
+
University of Texas at San Antonio, Department of Finance, San Antonio, TX 78249, United States, phone: +1
(210) 458-6838, email: <natasha.burns@utsa.edu>.
**
Corresponding author. J. Henry Fellers Professor of Business Administration at the University of South Carolina.
Columbia, SC 29208, United States. Email: <jean.helwege@moore.sc.edu>
We are grateful to George Allayannis, Chris Anderson, George Bittlingmayer, Ines Chaieb, Albert Chun, Laura
Field, Srini Krishnamurthy, Michelle Lowry, Laura Tuttle, Vivian Wang and seminar participants at the 2010
American Finance Association Meetings, the 2008 NYAFF, the 2008 SNB-CEPR conference, the 2008 FMA, HEC
Montreal, University of Kansas, New York Federal Reserve, Penn State University and Temple University for helpful comments. Anya Mkrtchyan, Ngoc Nguyen, Andy Park, Jin Peng, Qin Wang and Yuan Wang provided excellent
research assistance.

Electronic copy available at: http://ssrn.com/abstract=1362033

Foreign Currency Exposure and Hedging:

Evidence from Foreign Acquisitions

Abstract
While theoretical research suggests that many firms should have significant exchange rate exposure,
empirical research has documented a low stock price reaction to exchange rate movements. Against
this backdrop, this paper examines a sample of U.S. firms that engage in large acquisitions abroad,
entailing that exchange rate risk with regards to the currency of the target country is relevant for the
sample firms around the time of the deal. Despite strong priors, the stock returns of the sample firms
show empirically surprisingly little exchange rate exposure before or after the transaction. However,
despite the fact that individual time-series estimates of currency exposure are frequently not statistically significant, the results show that they are still economically meaningful and significantly different from zero on average. While the propensity to use derivatives in the target currency increases with the size of the target firm, the use of derivatives or foreign currency debt overall does not seem to play much of role in managing currency risk in the context of foreign acquisitions. In contrast, there is evidence consistent with the foreign target firms providing operational
hedging benefits to the acquiring firms that reduce the impact of exchange rate risk on their stock
returns.

Electronic copy available at: http://ssrn.com/abstract=1362033

1. Introduction
Due to increasing globalization of business activity and integration of financial markets, foreign
exchange rate risk is regarded a major source of risk by CFOs of U.S. non-financial corporations
(Graham and Harvey, 2001). Exporters revenues fluctuate with currency depreciations and
manufacturers find their costs rise when currency movements make foreign inputs into production
more expensive. Even firms that do not directly transact with foreign firms are affected by currency
risk if import competition is strong. While financial theory has for many years quite unambiguously
suggested an effect of exchange rate movements on the cash flows and market valuations of
corporations via these different channels, it has often been challenging to reveal a link between
exchange rates changes and stock returns empirically.
To this end, this paper examines the effect of exchange rate risk on the stock returns of
U.S. firms that acquire target firms in foreign countries. The sample firms are selected so that the
acquisitions are large relative to the size of the acquirer. Consequently, there are strong priors for
exchange rate risk to matter for the sample firms around the time of the transaction, and this particular setting also allows identifying the specific currency that should be relevant. Since corporate hedging has an effect on the size of currency exposures, the effects of derivatives usage, foreign currency debt and operational hedging on the exchange rate exposure of the sample firms
are also explored.
Surprisingly, even among this sample of firms that are known to have major ties to a foreign country, there is only limited evidence of economically and statistically significant exchange rate exposure. Moreover, the stock returns of the sample firms are only to some degree
more sensitive to movements in the bilateral exchange rate to the currency of the country where
the target firms are based compared to trade-weighted multilateral exchange rates that are com1

Electronic copy available at: http://ssrn.com/abstract=1362033

monly used to estimate currency exposures. Nevertheless, cross-sectional tests of exposure do

show that the average exposure in the sample is significantly different from zero. Thus, even
though individual time-series estimates of exposure are often insignificant and estimated with a
lot of noise, these estimates are still economically meaningful and significant on aggregate.
A large foreign transaction likely leads to a large shift in the effect of exchange rate risk
on firm value. The analysis of the time-series pattern of the currency exposure of U.S. acquirers
shows that their exposures actually decrease significantly after the acquisition: U.S. firms with
positive or negative exposures before the transaction show exposures closer to zero after the foreign target has been acquired (an effect that is not due to simple mean reversion). Since stock
return exposures reflect only the effect of exchange rate risk on firms operations net of hedging,
it is important to consider the effect of currency hedging to interpret this result. To this end, two
channels of hedging seem particularly relevant in this context: financial hedging with currency
derivatives and foreign currency debt, and operational hedging.
The SEC filings of the U.S. acquirers reveal that only few of them use exchange rate derivatives and foreign currency debt in the currency of the target firms country. Moreover, these
financial hedges do not appear to have a significant effect on the estimated exchange rate exposures. This suggests that currency derivatives only play a small role in the management of currency risk in the context of foreign acquisitions, in line with more general evidence based on
large samples of non-financial companies (Guay and Kothari (2003), Bartram, Brown and
Minton (2010), and others). However, the results suggest that the estimated exposures are small
because the acquisitions often serve to offset existing exposures. That is, in many cases the acquiring company either begins production abroad in a country where it already has substantial
sales, thus moving its costs into the same currency that it receives revenues, or it acquires more

production facilities at the same time that it expands sales, thus restricting its new exposure to
foreign profits. Thus, the results are consistent with the target firms providing significant operational hedging to their U.S. acquirers that reduce the exchange rate exposure of their stock returns, suggesting that corporate managers are savvy in managing currency risk in the context of
foreign acquisitions.
The remainder of this paper is as follows: Section 2 includes a literature review and discusses the empirical tests. Section 3 describes the data. Section 4 describes the characteristics of
the sample firms, the operations of the acquirers prior to the deals, and their use of financial derivatives and foreign currency debt. Section 5 presents the results on stock return exposures and
relates them to the use of hedging strategies. Section 6 concludes.

2. Analytical framework and Related Work

Following Adler and Dumas (1984), foreign exchange rate exposure is traditionally estimated in
time-series regressions of exchange rate changes, market index returns and potentially other control variables on the returns of individual stocks or portfolios. Specifically, the typical regression
model is specified as
Rjt = j + jRMt + jRFXt + jt

(1)

where Rjt is an individual firms stock return over period t, j is a constant, RMt is the return on
the market index (measured by the CRSP valued weighted index), and RFXt is the percentage
change in the foreign exchange rate. The exchange rate is defined in U.S. dollars per unit of foreign currency so that the estimate of the foreign exchange rate exposure, j, is positive for net
exporters and negative for net importers. In most studies, the percentage of firms with statistically significant exposures tends to be only about twice the chosen level of statistical significance (see Jorion, 1990; Bodnar and Gentry, 1993; Amihud, 1994; Khoo, 1994; Choi and
3

Prasad, 1995; Bartov, Bodnar and Kaul, 1996; Allayannis, 1997; Glaum, Brunner and Himmel,
2000; He and Ng, 1998; Miller and Reuer, 1998; Dominguez and Tesar, 2001; Griffin and Stulz,
2001; Bartram, 2004; Doidge, Griffin and Williamson, 2006; Bartram and Karolyi, 2006). 1 For
example, Jorion (1990) finds that only 5.2% of his sample of U.S. multinational firms has a significant currency exposure estimate of any sign at the 5% significance level. This is hardly more
than what one would expect from a random sample of estimated coefficients drawn from a population with a mean of zero.
In order to compare the results to those in the existing literature, the analysis in this paper
begins by estimating Equation (1) for the sample of U.S. acquirers of foreign targets using a
trade-weighted, multilateral exchange rate. Next the multilateral exchange rate is replaced with
the bilateral exchange rate of the target country since this currency should be most relevant in the
context of the foreign acquisition. The regressions are estimated using weekly data over a four
year period centered on the acquisition date. While estimates with monthly data are also presented for comparison to previous studies, weekly data are preferred in order to limit the sample
period to a time when exposure to the bilateral rate is known while still having a large number of
observations. 2
If U.S. firms acquire foreign targets as a means of entry into new markets, the exchange rate
should matter only after the acquisition. 3 Specifically, a U.S. firm that never had any sales to a
foreign country, but subsequently acquired a firm in that country, should have an insignificant
estimate of j in Equation (1) if the only data analyzed are from the pre-acquisition period. In this
1

See Bartram and Bodnar (2007) for a review of the literature.

Several papers highlight the sensitivity of the estimated exposure to the horizon (e.g., Bodnar and Wong, 2003;
Chow, Lee and Solt, 1997a, 1997b; Griffin and Stulz, 2001), and Dominguez and Tesar (2003) in particular show
that monthly returns result in slightly higher coefficients. This suggests that our use of weekly returns may slightly
understate the extent to which currency movements matter.
3
In unreported results, currency exposures are estimated using the announcement date instead of the completion
date and find qualitatively similar, albeit somewhat weaker, results.
2

case, exchange rate movements would only play a significant role in the firms stock returns in the
period after the acquisition, suggesting the following specification of the stock return regression:
Rjt = j + jRMt + jRFXt + jaRMt + jaRFXt + jt,

(2)

where is an indicator variable for observations after the deal and ja captures the post-deal
exposure. Because the sample contains only deals where the size of the target is large relative to
the market capitalization of the acquiring firm, j may also change after the deal if the combined
entitys market risk differs from that of the U.S. firm before it took such a large entity under its
wings. Therefore, Equation (2) also allows for a different post-deal exposure to the market
portfolio. Alternatively, a zero coefficient of the pre-deal exposures can be imposed and
Equation (2) rewritten as follows:
Rjt = j + jRMt + jaRMt + jaRFXt + jt,

(3)

Some firms may already have a presence in the target country and, therefore, have significant exposure to the targets currency before the deal. In that case, Equation (2) would allow
for more general testing of currency exposure. In particular, if a U.S. acquirer is already exporting to the targets country, the deal may well serve as an operational hedge (see, e.g. Pantzalis,
Simkins and Laux, 2001; Bartram, Brown and Minton, 2010). For example, if a U.S. firm is a net
exporter prior to the acquisition (j in Equation (2) is positive), and the acquisition provides the
firm with production facilities in the target country, its costs as well as its revenues will be sensitive to the exchange rate in the later period. Because one is offsetting the other, the overall exposure is small in the second period, which would show up in Equation (2) as a positive j and a
negative jz. Thus, an operational hedge reduces the impact of exchange rate risk on the firms
stock return, and both j and ja could be significantly different from zero.

Regardless of the underlying exposure of a U.S. firm in each period, the estimates of currency exposure in Equations (1)-(3) will be zero if the firm uses financial derivatives or foreign
currency debt to hedge the currency risk. This effect can be examined with data on the use of derivatives collected from the SEC filings of the sample firms. Previous studies on corporate hedging find that smaller firms are less likely to use derivatives, likely due to the cost associated their
use in particular and/or with setting up professional risk management in general (Guay and
Kothari, 2003). However, it is possible to assess whether firms have access to derivatives markets in principle by collecting information not just on currency derivatives, but also for interest
rate and commodity price derivatives. If firms wish to hedge but cannot do so because of lack of
access to the currency derivatives market (Starks and Wei, 2004), they would not have contracts
involving interest rate risk or energy derivatives. In addition, the effect of debt denominated in
the (foreign) currency of the target on the exposure of the acquirers can be assessed since this
information is also available in the SEC filings.

3. Data
The sample consists of all U.S. firms that acquired foreign firms during the period 1996-2004 as
reported by the Securities Data Corporation (SDC). Only acquisitions are included that led to
control of the target (more than 50% of the shares outstanding), that have an SDC deal value of
at least 5% of the market capitalization of the acquirer, as reported on CRSP, and where the target stock price is available, either on DataStream or Bloomberg. 4 There are 120 acquisitions that
meet these criteria. In addition, the acquirer stock price has to be available for at least 45 weeks
on both sides of the acquisition week. One deal is dropped from the sample because the target
firms only asset is equity in the acquirer, and another five are deleted because there are no SEC
4

The average fraction of the target acquired in the deal is 98% and the median 100%.

filings for the acquirer for the relevant time period. Three more deals are excluded where the target country currency is pegged to the U.S. dollar, yielding a final sample of 102 transactions.
Data on the foreign operations, derivatives usage, and the currency denomination of debt of
the acquirer are hand-collected from SEC filings around the time of the acquisition, typically 10-K
filings. Some companies provide detailed information on sales by country, while others only list
sales by region or continent. In the latter case, the lists of subsidiaries and the locations of their
properties are use to determine whether the deal leads to new entry into the country. Details on the
currency of debt issues are also scant. Because loans e.g. by Canadian banks are sometimes
denominated in U.S. dollars the country of origin of the lending bank is not sufficient evidence that
a loan is denominated in a foreign currency. Therefore, debt is only categorized as denominated in
the target countrys currency if the firm states that it is or if this is apparent from the bond
description on Bloomberg. Accounting data for the sample firms are from Compustat.

4. Currency Hedging and Gross Exposures of U.S. Acquirers

Table 1 presents summary statistics for the sample of 102 deals. They occur more often in the late
1990s (Panel A), when the value of the stock market was relatively high and firms could more
easily pay for acquisitions with stock (Panel B). Slightly more than two fifths of the deals involve
some equity. Canada and the U.K. dominate the list of target countries, with each representing about
a third of the sample (Panel C). Results of unreported tests that exclude firms in these countries are
qualitatively similar. Most of the target companies are in the same industry as their acquirers and
these tend towards software or manufacturing (Panel D). By construction, the target companies are,
however, large relative to the acquiring firm. In practice, this limits the typical size of the U.S. firm
since few very large foreign companies would likely be targets and still be at least 5% of the market
capitalization of the acquirer (Panel B). The acquirers, however, are not typically small, although a
7

few are start-ups with no revenues. About three-quarters are established enough to have trading
relationships with more than one country prior to the deal, as seen in Panel E. These multinational
companies also tend to be the larger firms in the sample, as seen by the median value of their market
values.
Table 2 presents evidence on operational and financial hedging. Most firms have sales in
the target country before buying their target companies, and most also have production facilities
in these countries, indicating that the acquisition could serve as a natural hedge for existing business ties. In contrast, few acquiring firms use currency derivatives before the completion of the
deal. While over 70% of the firms have a reason to hedge with derivatives tied to the exchange
rate of the target country before the deal, only about 40% use any currency derivative in the that
period, and most involve a different currency: Less than 15% of the firms use forwards, swaps or
options in the targets currency prior to the acquisition. That fraction increases sharply after the
deal is completed, although only to about one third. 5 Moreover, when these currency derivatives
are deployed, they involve small notional amounts. For the firms that have derivatives in the targets currency and report notional values, the average notional value is only about a quarter of
the size of the deal value. Given that the acquisition is less than a third of the market capitalization of the acquirer, these data imply that when firms use currency derivatives in the targets currency, they only hedge a small portion of the value of the firm. The relatively infrequent use of
currency derivatives does not owe to a lack of access to capital markets or concerns about counterparty risk, as the majority of acquirers in the sample use some kind of derivative contract.
Over half use currency derivatives after the acquisition and another 13% use interest rate or

The post-merger use of currency derivatives in the target country is below 43% (the sum of the percentage that use
forwards, swaps and options) because some firms use more than one type of hedging instrument.

commodity derivatives. Only about 40% of the firms hedge with target country currency derivatives at any point in time.
Table 3 shows the results of logit regressions on the use of financial derivatives by the
acquirer. Estimates on the left side of the table (models (1) through (4)) reveal factors that affect
the likelihood of using derivatives in the target country currency after the deal is completed. Because some currencies have less liquid derivatives markets, it may be in the interest of acquiring
firms to cross-hedge with a closely correlated currency that offers a less costly hedge. Further,
SEC disclosures do not always specify the currency of the derivative contract and, thus, firm
might falsely be classified as not using currency derivatives tied to the targets exchange rate
when it, in fact, does. Therefore, alternative specifications of the logit regressions are estimated
where the dependent variable is one whenever a firm uses any currency derivative (the right side
of Table 3, models (5) through (8)).
The results on the use of currency derivatives are largely consistent with the previous literature in that large firms are more likely to use these instruments than smaller firms, as are firms
that have already established expertise with other derivative products (Gczy, Minton, and
Schrand, 1997). Thus, part of the low usage of derivatives seen in Table 2 reflects the fact that
some of the sample firms are too small to access these markets (Starks and Wei, 2004). The results are also consistent with firms being more willing to bear the costs of derivatives hedges
when the target is very large and would increase the underlying exposure to a greater extent, although the relative deal value variable is not always significant. 6 Another instrument of corporate hedging is the use of foreign currency debt. The results in Table 3 show that firms that use

While more volatile currencies entail a larger increase in the volatility of the acquirers cash flows, unreported results do not show a significant impact of the volatility of the target currency on the propensity of acquiring firms to
use derivatives.

debt denominated in a foreign currency are also more likely to use currency derivatives, suggesting that they may be used together to manage the currency risk of the acquisition.

5. Stock Return Regressions and Currency Exposure

Table 4 reports the percentage of U.S. acquirers with significant estimates of currency exposure
(j in Equation (1)) using a multilateral exchange rate and bilateral exchange rates, respectively.
Panel A shows that only 10.8% of the firms have significant positive estimates for j when a
trade-weighted currency basket is used to estimate currency exposures, and another 2.0% have
significant negative exposure coefficients (at the 5% significance level). Thus, despite strong
priors, the total fraction of firms with significant time-series coefficients is at 12.8% similar to
results in previous studies and not large by any means. Panel B shows that, surprisingly, replacing a general currency index with the specific bilateral exchange rate for the country of the acquisition target scarcely matters. The table also shows that while the results in the paper are
based on weekly data in order to have the estimation window closely around the date of the acquisition, the use of monthly data yields very similar results.
Note that significant coefficients are more often positive, implying that the sample has
more net exporters than net importers. This imbalance allows testing whether the average coefficient of the time-series regressions is significant in the cross-section. 7 The average exposure in
the sample is indeed significantly different from zero, suggesting some role for exchange rate
risk in stock returns (t-statistics of 2.94 and 3.64 for multilateral and bilateral exchange rates, respectively). This is true both for weekly and monthly returns and for exchange rate exposure to

In contrast, if the sample were evenly split between net exporters and net importers, the mean coefficient would be
close to zero and would not be significant. A further consideration in testing the significance of the average j is that
some countries have greater variation in their exchange rates than others, which would affect the magnitude of j. In
order to make the estimates of j comparable across firms, each exchange rate is normalized by its standard deviation
over the four year estimation period.

10

bilateral and multilateral exchange rates. The fact that the currency movements are only significant when tested with cross-sectional analysis suggests that while the individual time-series estimates are estimated with a lot of noise, these estimates are still economically meaningful and
significant on aggregate.
While Table 2 suggests that hedging with derivatives in the target country currency is not
common, it may still reduce the fraction of firms with significant time-series exposure estimates.
To this end, Table 5 investigates the effect of hedging with financial derivatives on currency exposures using weighted least squares regressions where the weights in the regression are the inverse of the standard errors of the exposure estimates in the time series estimations. The exposure estimates for the post-acquisition period are regressed on indicator variables for the use of
derivatives and foreign currency debt (in the currency of the target), the pre-acquisition exposure
of the foreign target, as well as the change in sales of the acquirer to the target country, or alternatively dummy variables indicating a large positive (more than 25% of total sales) or negative
change in sales. Most of the variables use hand-collected data which is available for 29 companies.
The results show little evidence of financial hedging playing a major role in the currency
management of U.S. firms in the context of their foreign acquisitions, since variables for the use
of derivatives and foreign currency debt denominated in the currency of the target firm are both
insignificant. The small economic effect of derivatives on currency exposures in the context of
foreign acquisitions is consistent with more general evidence for larger samples of non-financial
companies (Guay and Kothari (2003), Bartram, Brown and Minton (2010), and others). Moreover, the exposure of the foreign target in the pre-acquisition period is also not important for the
change in the exposure of the U.S. acquirers. However, variables representing the increase in

11

sales due to the acquisition of the target are significantly positive, as expected. The dummy variable for a negative change in sales is not significant, but it is only set to one for a small group of
firms. In all models, the adjusted R-square, which is typically about 0.2, is increased by using
dummy variables for the magnitude of foreign sales instead of continuous variable. Thus, in line
with the literature, the results suggest that estimated foreign exchange exposures do reflect the
underlying cash flow exposures.
Given that the cross-sectional tests are significantly positive for the sample as a whole,
but never significant for firms that enter the target country with the deal, exposure is likely more
significant for net exporters and for firms that are doing business in the target country for the entire four years. While the estimates of currency exposure for these firms may not be significant in
the time-series, they may be significant in the cross-section. If so, firms with sales to the target
country before the deal should have more often positive estimates for j, whereas the coefficients
for firms with no prior presence should split evenly between negative and positive (as would occur with random draws from a distribution with a mean of zero).
To this end, Table 6 presents cross-sectional tests separately for the sample as a whole,
for firms with sales to the target country before the deal, and for firms with no presence in the
target country before the deal. 8 The exposure estimates presented in Table 6 are based on Equation (2), and as seen earlier, are very rarely significant for an individual firm. However, the coefficients in the pre-merger period are positive about two-thirds of the time, more often than would
be expected if they were drawn randomly from a mean zero distribution, and the average coefficient is significantly positive as predicted. In contrast, firms with no presence in the target country prior to the deal are evenly split between positive and negative exposure coefficients, and the
cross-sectional test is insignificant. This is consistent with foreign sales of U.S. acquirers in the
8

Five firms were producing in the target country but not selling there, they are not considered separately.

12

target countries prior to the foreign acquisition leading to a stronger effect of currency risk on
their stock returns before the transaction.
The large fraction of firms that sell to the target country prior to the deal suggests that the
foreign acquisitions may serve as operational hedges, even if they were undertaken for reasons
other than currency risk management, such as reducing transportation costs, access to product
markets or overcoming cultural hurdles in marketing. If firms tend to move operations abroad
whenever business in the target country is important (and therefore when currency risk might be
very large), exchange rate movements may not matter much for stock returns because of natural
hedging reducing currency exposures. Consequently, the acquisitions might dampen the impact
of exchange rate shocks on stock returns, and ja would have the opposite sign as j. This means
that positive exposures in the pre-merger period will be smaller after the acquisition, i.e. the
marginal currency effect ja will be negative for net exporters. Similarly, net importers, i.e. firms
with negative exposures in the pre-merger period, will have positive marginal exposures after the
transaction.
The effect of operational hedging on the stock return exposures is investigated in Table 7.
For net exporters, i.e. firms with positive exposure in the period before the merger, the currency
coefficient is significantly negative in the post-merger period (t-statistic = -2.67). Likewise, for net
importers (those with a negative exposure in the pre-merger period), the post-merger exposure is
less negative (positive coefficient with a cross-section t-statistic of 3.13). These results suggest that
the acquisitions serve to lower the existing currency exposures of U.S. acquirers. A potential
concern with these results is that they might simply reflect reversion to the mean exposure, i.e. a
similar set of estimates for a random sample of firms would also show that positive (negative)
coefficients are followed by negative (positive) coefficients. In order to investigate this issue, the
13

same analysis is performed for a randomly drawn sample of matching firms, using the acquisition
date of each U.S. acquirer as if it occurred for the match as well. The matched sample consists of
102 firms that are in the same industry and have similar size as the acquiring sample firms, but that
did not do a major acquisition in the target country in the respective period. The estimated changes
in the foreign exchange rate exposure of the sample of matched firms, shown in Panel B of Table 7,
do not show the opposite sign to the exposure estimated in the pre-merger period and are not
statistically significant cross-sectionally, indicating that the coefficients for the sample of acquirers
are not changing sign simply due to mean reversion. Consequently, Panel A provides some
evidence that operational hedging occurs on average as a result of the takeovers. Overall, the results
suggest that managers of U.S. corporations are carefully managing currency risk in the context of
acquiring target firms abroad.

6. Conclusion
This paper examines the effect of exchange rate risk on the stock returns of U.S. acquirers of foreign target firms. Given that the targets are selected to be large relative to the size of the acquiring firms, currency risk with regards to the currency of the target country is likely important in
the context of the acquisition. Nevertheless, since non-financial corporations have a competitive
advantage at managing business risk, but not currency risk, it is likely that savvy managers are
aware of the currency risk their firm is facing and will manage it using financial and operational
hedging. The empirical results show that the time-series estimates of foreign exchange rate exposures of U.S. acquirers are typically small and often not statistically significant, regardless of
whether exposures are estimated with regards to the specific currency of the target country or a
much broader currency index. Nevertheless, cross-sectional tests of exposure do show that the
average exposure in the sample is significantly different from zero. Thus, even though individual
14

time-series estimates of exposure are often insignificant and estimated with a lot of noise, these
estimates are still economically meaningful and significant on aggregate.
The fact that the individual time-series exposures of firms that acquire large foreign targets are economically and statistically small seems surprising at first, but these estimates are
measures of the net exposure of firms, i.e. after accounting for how gross exposure is reduced via
various forms of corporate hedging. The analysis of the time-series pattern of the currency exposure of the acquirers shows that their exposures actually decrease significantly after the acquisition. However, few of the sample firms use of exchange rate derivatives and foreign currency
debt in the currency of the target firms country, and financial hedging does not appear to have a
significant effect on the estimated exchange rate exposures. This indicates that currency derivatives only play a small role in the management of currency risk in the context of foreign acquisitions. However, the results suggest that the estimated exposures are small because the acquisitions often serve to offset existing exposures, i.e. they are consistent with the target firms providing significant operational hedging benefits to their U.S. acquirers that reduce the exchange rate
exposure of their stock returns.

15

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18

Table 1: Summary Statistics for Acquisitions of Foreign Targets by U.S. Firms

The table shows summary statistics on the sample firms. The sample consists of 102 acquisitions of foreign target firms by
U.S. firms during the sample period 1996-2004. Acquisitions are limited to those where the acquirer obtains more than
50% of the target and where the deal value is at least 5% of the market capitalization of the acquirer. Targets must be publicly traded in their home country.

Panel A. Time
Year
1996
1997
1998
1999
2000
2001
2002
2003
2004
Total

Panel B. Deal Characteristics

N
3
13
26
21
10
8
6
12
3
102

Panel C. Geography
Target Country
Australia
Canada
Denmark
France
Germany
Israel
Italy
Mexico
Netherlands
New Zealand
Norway
Singapore
Sweden
Switzerland
Taiwan
Thailand
United Kingdom
Total

N
6
39
2
1
4
2
2
1
2
1
4
1
2
2
1
1
31
102

Deal value (US$)

Acquiring firm market value (US$)
Percent of deal compensation paid in stock
Percent of deal compensation paid in cash
Percent of deals that used debt financing
Percent of deals that used equity financing

Panel D. Industry
Industry
Business services
Oil and gas extraction
Other electrical equipment, not computers
Precision instruments
Computers
Chemicals and allied products
Paper
Food and kindred products
Total of most common industries

Mean
935.3
3209.5
35.7
57.0
4.9
43.1

Median
291.3
1161.3
0.0
72.9
0.0
0.0

Acquirer
16

Target
16

13
11
9
8
6
5
4
72

14
11
8
8
7
3
4
71

Mean
3226.8

Median
1425.0

3156.0

424.3

Panel E. Multinationals and Market Value

Multinationals prior to deal (n=77)
Acquisition is first international deal or
in same single country as before (n=25)

19

Table 2: Hedging and Exposure Characteristics of U.S. Acquirers and Foreign Targets
The table presents characteristics of U.S. acquirers and foreign targets with regards to their gross exposure and
hedging characteristics in the pre-merger and post-merger period. The pre-merger period covers 2 years before
the merger, and the post-merger period covers 2 years after the merger.

Pre-Merger

Post-Merger

Acquirer produces in or sells in target country

Acquirer uses currency derivatives of any kind
Acquirer uses currency derivatives in target currency
Acquirer uses forwards in target currency
Acquirer uses swaps in target currency
Acquirer uses options in target currency
Notional value relative to deal value
Acquirer has interest rate swaps
Acquirer has debt denominated in target currency

71%
39%
15%
11%
2%
2%
27%
36%
18%

56%
33%
24%
6%
13%
25%
39%
42%

Target produces outside of target country

Target sells outside of target country

84%
91%

20

Table 3: Determinants of Foreign Currency Derivatives Usage

The table reports results of logit regressions where the dependent variables are one if the acquiring firm uses any type of foreign currency derivative (models (1)(4)) and if the firm uses foreign currency derivatives in the currency of the target country (models (5)-(8)), respectively, and zero otherwise. Derivatives usage is
measured in the year after the acquisition. Relative deal size is the amount the acquirer paid for the target divided by its market value. Market value of the acquirer is the market value of equity 6 months prior to the acquisition. "Acquirer sells in target country prior to deal" is an indicator variable set to one for firms
that had sales in the target country prior to the deal, and zero otherwise. "Acquirer uses interest rate derivatives" is an indicator variable set to one if the acquirer
uses interest rate derivatives, and zero otherwise. "Acquirer uses foreign currency debt" is an indicator variable for firms that have debt denominated in the currency of the target's country, and zero otherwise. Chi-squared statistics are reported in bold and marked with *, ** and *** when significant at the 10%, 5% and
1% or lower level, respectively.

Derivatives in Target Country Currency

Relative deal size
Market value of acquirer

Any Foreign Currency Derivatives

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

1015.5
2.82*
0.69
15.28***

1028.7
2.90*
0.72
15.51***
-0.34
0.44

999.9
2.71
0.68
13.65***

738.2
1.25
0.72
15.53***

497.9
0.71
0.72
17.19***

526.6
0.79
0.77
17.89***
-0.61
1.52

354.4
0.34
0.67
13.85***

297.8
0.22
0.72
17.46***

Acquirer sells in target

country prior to deal
Acquirer uses interest rate
derivatives
Acquirer uses debt denominated
in a foreign currency

0.12
0.06

1.10
4.86**

-10.95
16.90***

-11.10
17.14***

-10.81
15.84***

0.94
3.48**
-11.62
17.47***

N
Dependent variable is one

102
34

102
34

102
34

102
34

102
57

102
57

102
57

102
57

Pseudo R2

0.18

0.18

0.18

0.21

0.21

0.22

0.25

0.22

Intercept

21

-9.89
15.81***

-10.17
16.13***

-9.53
13.59***

0.65
1.80
-10.05
16.41***

Table 4: Exchange Rate Exposure of U.S. Acquirers

The table shows statistics on the exchange rate exposure of U.S. acquirers. The stock return of each acquiring
firm is regressed on the percentage change in an exchange rate variable and the return on the value-weighted
U.S. stock market index during the four years surrounding the acquisition. The exchange rate is either measured by a trade-weighted basket of currencies (Panel A) or the bilateral exchange rate of the U.S. dollar to the
target country currency (Panel B). In the latter case, the exchange rate change is normalized, as described in
the main text. Exchange rates are in U.S. dollars relative to foreign currency. The table shows the percentage
of significant positive and negative coefficients at the 5% significance level, average coefficients as well as associated t-statistics.

Weekly data
(n=102)
U.S.
Exchange
Market
Rate
Index

Monthly data
(n=102)
U.S.
Exchange
Market
Rate
Index

A. Exposure to Multilateral Exchange Rate

Percent significant positive
Percent significant negative
Average coefficient
Cross-section t-statistic

10.8%
2.0%
0.218
2.94

91.2%
0.0%
1.048
17.55

8.8%
0.0%
0.287
2.39

74.5%
0.0%
1.048
14.53

B. Exposure to Bilateral Exchange Rate

Percent significant positive
Percent significant negative
Average coefficient
Cross-section t-statistic

11.8%
1.0%
0.003
3.64

89.2%
0.0%
1.005
16.77

10.8%
1.0%
0.008
3.27

69.6%
0.0%
1.193
13.01

22

Table 5: Effect of Derivatives on Exchange Rate Exposures

The table shows results of regressions of the incremental exposure of U.S. acquirers on various characteristics of the
acquirers and target firms. The dependent variable in the regressions is the estimated coefficient from time-series regressions of the stock return of each acquiring firm on the percentage change in the exchange rate between the U.S.
dollar and the currency of the target country and the return on the value-weighted U.S. stock market index during the
two years after the acquisition. Explanatory variables include a dummy variable with value one if the acquirer has derivatives in the currency of the target country, a dummy variable with value one if the acquirer has foreign currency
debt, as well as a dummy variable indicating whether the target had a significant time-series exposure prior to the
transaction at the 5% level. The change in foreign sales of the acquirer is the change in sales to the target country
scaled by the prior years total sales when available; otherwise it is the change in sales to the region that includes the
target country; when not available it is the change in foreign sales for the firm. Alternatively, dummy variables are
included indicating a large positive (more than 25% of total sales) or negative change in sales. P-values are listed below regression coefficients and are marked with *, ** and *** when significant at the 10%, 5% and 1% or lower level,
respectively.

(1)
Acquirer has target country currency derivatives
Acquirer has foreign currency debt

(2)
0.375
0.540
0.002
0.285

Target has significant positive exposure to US

(3)
0.647

0.003
0.260

Acquirers change in sales to target country

0.013
0.009*

Acquirer has large positive change in sales to target country

Acquirer has negative change or no change in sales to
target country
Intercept

Adjusted R2
N

23

0.012

0.011

0.010
0.965

0.002***
0.002
0.003
-0.343
0.173

0.004***
0.000
0.001
-0.205
0.356

0.064
29

0.243
29

0.254
29

Table 6: Exchange Rate Exposure and Pre-Merger Activity of Acquirers in the Target Country
The table shows statistics on the bilateral exchange rate exposure of U.S. acquirers in the pre-merger period by activity in
the target country prior to the merger. Results are presented separately for the full sample, acquirers that sell in the target
country prior to the deal, and for acquirers that have no presence in the target country prior to the deal. The percentage of
firms with significant positive or significant negative foreign exchange rate exposures is at the 5% level. Foreign exchange
rate exposure is estimated as the coefficient on the normalized bilateral exchange rate between the U.S. dollar and the currency of the target firm in a regression of acquirer stock returns on the exchange rate change and the return on the U.S.
value-weighted stock market index during two years prior to the acquisition.

Full Sample
102
100.0%

Acquirer Sells
in Target
Country Prior
to Deal
67
65.7%

Acquirer Has
No Presence in
Target Country
Prior to Deal
30
29.4%

63.7%
7.8%

68.7%
6.0%

50.0%
6.7%

Negative
Significant negative

36.3%
1.0%

31.3%
1.5%

50.0%
0.0%

Average
Cross-sectional t-statistic
Cross-sectional p-value

0.003
3.59
0.001

0.003
3.66
0.001

0.002
1.32
0.198

Number of firms
Percent of sample
Exchange Rate Exposure in Pre-Merger Period
Positive
Significant positive

24

Table 7: Bilateral Exchange Rate Exposures of Net Exporters and Net Importers
The table shows results on the exchange rate exposure of U.S. acquirers before and after the merger (Panel A)
and a sample of matched firms without acquisitions (Panel B). Panel A presents exposure estimates for acquiring firms, separately for net exporters and net importers. Net exporters (importers) are firms with a positive
(negative) exchange rate exposure prior to the acquisition, where the exposure is measured as the coefficient on
the normalized bilateral exchange rate between the U.S. dollar and the currency of the target firm during the two
years prior to the acquisition, controlling for the return on the value-weighted U.S. market index. Panel B shows
results for a matched sample of 102 firms in the same industry and having similar sizes to the acquiring sample
firms, but which did not do a major acquisition in the target country. Matching firms have estimated coefficients
on exchange rates for the same time period as the associated acquiring firm. The table shows, separately for premerger and post-merger period, the average coefficients as well as associated t-statistics and p-values.

Pre-Merger

Post-Merger
Bilateral
U.S. Market
Exchange
Index
Rate

Bilateral Exchange Rate

U.S. Market
Index

A. Acquiring Firms
Net Exporters (N=66)
Average coefficient
Cross-section t-statistic
Cross-section p-value

0.008
10.07
0.001

1.035
12.23
0.001

-0.004
-2.67
0.010

-0.043
-0.56
0.581

Net Importers (N=36)

Average coefficient
Cross-section t-statistic
Cross-section p-value

-0.004
-5.92
0.001

1.035
11.93
0.001

0.006
3.13
0.003

0.073
0.70
0.488

Net Exporters (N=66)

Average coefficient
Cross-section t-statistic
Cross-section p-value

0.006
5.78
0.001

0.865
11.63
0.001

0.000
-0.36
0.723

0.148
2.14
0.036

Net Importers (N=36)

Average coefficient
Cross-section t-statistic
Cross-section p-value

-0.003
-2.43
0.020

1.046
11.34
0.001

-0.004
-1.92
0.063

0.000
0.00
0.998

B. Matched Sample

25