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Cross-Border M&A Flows, Economic Growth, and Foreign Exchange Rates

Steven Riddiough¹; Huizhong Zhang²

¹ University of Toronto Scarborough, and Rotman School of Management, University of Toronto , · ² Monash Business School, Monash University ,

Abstract We extract information about future economic conditions from firms’ cross-border merger and acquisition announcements, and show it predicts changes in relative economic growth rates and foreign exchange rate returns. We find the predictability is driven by the acquisition decisions of domestic firms, which signal turning points in local economic growth. The findings are motivated by a simple model of exchange rate determination with heterogeneous expectations and support the theorized relationship between foreign exchange rates and macroeconomic fundamentals. The results provide new tools for policy makers seeking to predict economic activity and offer global investors a novel source of portfolio diversification.

DOI

10.1093/rfs/hhaf109

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en

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