Abstract
As a result of the increasing volatility in financial markets, the use of financial derivative instruments (forward, futures, option, and swap) has become widespread particularly between large firms around the world. Market risk can be grouped into three categories: exchange rate risk, interest rate risk and commodity price risk. By employing financial derivatives, companies can manage these risks. It is required by International Financial Reporting Standards (IFRS) to reveal their financial positions on financial instruments in their financial reports. The related details in financial reports regarding financial derivatives make it possible to do empirical research on the impact of derivative use on firm value. Along with the mixed results on the relationship among hedging and firm value, empirical research that question the impact of hedging on firm operating activities have been unexpectedly missing. In this study, we aim to examine a significant type of firm operations, cross-border mergers and acquisitions, which is well known for changing a firm’s financial risk exposure. By studying the effect of hedging on firm performance through cross-border M&As, we aim to find out whether and in what way risk management affects firm performance. With a sample of 537 cross-border mergers and acquisitions (M&As) conducted by 14 different developed European companies between 2007 and 2019, we find evidence that acquirers with financial hedging programs have higher cumulative abnormal returns (CARs) than those without such programs around deal announcements. Event study, T-test and Mann-Whitney Test are used as research methods in this study. Additionally, our results show that derivatives users experience longer deal completion times than non-users. Overall, this study provides findings for the European region on the connection between corporate financial hedging and firm performance. Our findings regarding Europe support the previous study in the USA.
Highlights
National, as well as global firms, concentrate on numerous restructuring activities to survive the effect of growing competition
The findings indicate that acquirers involved in foreign exchange risk hedging provide announcement cumulative abnormal returns (CARs) that are higher than acquirers who do not
Our findings indicate that users of derivatives have higher CARs than non-hedgers which is consistent with our Hypothesis 1
Summary
As well as global firms, concentrate on numerous restructuring activities to survive the effect of growing competition. It is very important for firms to keep their continuity in good condition and to know how to survive a competitive environment that are distinguishing and complicated. Along with these competitive environments, one of the most important activities with the biggest influence is the growth in operations. One of them is the activity of the company to grow by using the resources it creates or outsourced. Another type of growth is external growth by acquiring or merging with another company.
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