Research On The Effect Of Exchange Rate Fluctuation On The Cross-Border M&A Of Firms In China

Following the national strategies like "Going Out" and "One Belt and One Road"carried out,there is a rapid growth of Chinese cross-border mergers and acquisitions(M&As),with the noticeable characteristic like "peak distribution" as the growth rate or ratio in outward foreign direct investment(OFDI)in several individual years is much higher than years around.In previous literature,researchers pay much attention to the influencing factors of cross-border M&A,such as geographical distance,institutional environment,social culture,accounting standards,etc.But these factors are more suitable to describe the continuous or accumulated changes of cross-border M&A behaviors,while difficult to explain the mutation feature as "peak distribution" during time series.Hence,there may be several short-term incentives,which could push enterprises to make cross-border M&A decisions.Exchange rate,which is an important influencing factor in foreign economic transactions,would inevitably affect firms' operation,investment and financing activities.Then,in the case of the market-oriented reform of RMB exchange rate system and the frequent fluctuations of exchange rate among countries around the world,would Chinese firms grasp the advantage of exchange rate and practice arbitrage through cross-border M&A?How efficient is the cross-border M&A under exchange rate shock?The existing literature has extensively investigated the relation between exchange rate fluctuation and firms,investment decision,the relation between exchange rate fluctuation and OFDI decision,also the influencing factors of M&A performance.However,as an important part of long-term firm investment as well as the main form of OFDI,cross-border M&A and whether it is affected by exchange rate fluctuation have not attracted much attention.Starting from the two elements of cross-border M&A—decision-making and efficiency,this paper measures exchange rate fluctuation from three dimensions—exchange rate level(appreciation or depreciation),exchange rate volatility degree and exchange rate expectation,and puts forward the conducting mechanisms of exchange rate fluctuation on cross-border M&A in order to explain the cause of "peak distribution",and further explores the economic consequences of cross-border M&A under exchange rate shock.This paper aims to answer three questions.First,whether and how exchange rate fluctuation affect cross-border M&A propensity?Second,whether and how exchange rate fluctuation affect cross-border M&A efficiency?Besides the financial performance of M&A,does exchange rate shock have an incremental effect on the production efficiency and resource allocation efficiency of cross-border M&A?Third,how the financing characteristics and payment method affect the relationship between exchange rate fluctuation and cross-border M&A?In view of the above research questions,using the basic ideas of theoretical framework including exchange rate pass-through,competitive advantage,asymmetric information,risk aversion and the real option theory,this paper builds the logical relationship of exchange rate fluctuation on decision-making and efficiency of cross-border M&A.In the respect of exchange rate fluctuation and cross-border M&A decision,first,this paper proposes "investment effect" and "hedge effect" hypothesis of the influencing mechanism of currency appreciation or depreciation on cross-border M&A.The"investment effect" refers to that appreciation would influence M&A ability through profitability,financing costs,total factor productivity while influence M&A demand through market competition environment,firms will make M&A decisions after weighing the capability and demand.The "hedge effect" refers to exchange rate appreciation would aggravate export difficulties and exchange rate risk environment,which will trigger the demand for cross-border M&A,and result as the positive influence of exchange rate appreciation on the decision-making of cross-border M&A.Second,this paper builds the competitive hypothesis of the relation between exchange rate volatility degree and cross-border M&A from the view of risk aversion and real option:enterprises which are motivated by risk aversion,will enhance the possibility of cross-border M&A to avoid additional losses caused by higher risk of exchange rate fluctuation in the future,meanwhile,enterprises will cancel or postpone cross-border M&A to obtain the real option value due to the M&A characteristics such as irreversible investment and asymmetric information.Third,in terms of exchange rate expectation and cross-border M&A decision-making,this paper puts forward the "price effect" that local appreciation expectation prompts cross-border M&A from the perspective of M&A cost,and the"substitution effect" that local appreciation expectation restrains cross-border M&A from the perspective of M&A future income.In terms of exchange rate fluctuation and cross-border M&A efficiency,this paper develops the "competitive advantage hypothesis","exchange rate governance hypothesis"and "valuation advantage hypothesis".The "competitive advantage hypothesis" indicates that exchange rate appreciation prompts competitive advantage driven M&A through the positive influence on purchasing power of foreign assets and firm total factor productivity,and the M&A efficiency will be higher due to acquisition cost reduction and improved resource integration ability.The "exchange rate governance hypothesis" indicates that exchange rate appreciation and higher volatility range will respectively intensify market competition and exchange rate risk environment,and then promote the value-driven cross-border M&A.The operational risk and currency risk will play a governance role in cross-border M&A and improve the efficiency.The "valuation advantage hypothesis"refers to that exchange rate appreciation will lead firms timing cross-border M&A decision by influencing the national stock market prices and firm valuation.The acquirer will obtain wealth effect from asset price advantage,but get a lower resources allocation efficiency due to lack of proper valuation of target enterprise and lack of effective judgment of synergy after the merger.In terms of the influence of financing characteristics of the acquirer and the mode of payment on the sensitivity of the cross-border M&A to exchange rate fluctuations,this paper puts forward the hypothesis that the exchange rate appreciation and the increase of exchange rate volatility degree will reduce the tendency of cross-border M&A of financing constraint enterprises by respectively leading to the shortage of liquidity and the increase of uncertainty in national credit system.Besides,this paper builds a logical mechanism of debt financing and venture capital on M&A efficiency,which will play a governance role in cross-border M&A,while cash payment can alleviate the exchange rate transaction risks and economic risks caused by long-term M&A process.In other words,debt financing,venture capital(VC)and cash payment will improve the efficiency of cross-border M&A of Chinese enterprises under exchange rate fluctuations.According to the research question and theoretical framework,this paper uses A-share non-financial firms during 2000-2016 as the sample of empirical test on the relation between exchange rate fluctuation and cross-border M&A decision,while uses the cross-border M&A cases which were declared and completed in 2000-2016 by A-share non-financial listed companies as research sample of test on exchange rate fluctuation and cross-border M&A efficiency.Three parts of empirical tests are as following:First,in the test of exchange rate fluctuation and cross-border M&A decision,this paper uses Probit model to regress the probability of cross-border M&A on exchange rate variables using domestic M&A as control.(1)We find that the appreciation of RMB nominal exchange rate against US dollar(hereafter NER)and real effective exchange rate(hereafter REER)could promote the M&A.The "investment effect" and "hedge effect" of the relation between exchange rate appreciation both exist,but the "hedge effect" mainly robust in the REER appreciation.Product market competition and national stock price can play the intermediary role in the above relation.(2)There is a significantly positive relation between exchange rate volatility degree and M&A propensity,while the cross-border M&A decision is more positively affected by the NER volatility degree,indicating the management risk aversion plays a more dominant role than the real option motivation.(3)Combined with exchange rate expectations,we show that the RMB depreciation expectation would promote cross-border M&A,and further positively adjust the relationship between exchange rate appreciation and cross-border M&A decision.The"substitution effect" of exchange rate expectations is proved.Second,in the test of exchange rate fluctuation and cross-border M&A efficiency,this paper measures M&A efficiency in four dimensions:financial performance as the cumulative abnormal return(CAR)in different windows around M&A announcement day and the increase of EBITA or ROE during the fiscal years around M&A;non-financial performance as total factor productivity increment;internal resource allocation efficiency as investment efficiency change;external resource allocation efficiency as change of sensitivity of capital investment on productivity.We use OLS regression model to explore the influence of exchange rate fluctuation on acquirer's financial performance,non-financial performance,internal and external resource allocation efficiency of cross-border M&A.We find that(1)while the cross-border M&A has received a positive evaluation in the short window period of the capital market on average,the accounting earnings and productivity of listed firms after M&A are lower than before the transaction.(2)The RMB exchange rate appreciation could improve the financial performance measured by profitability and non-financial performance measured by total factor productivity of cross-border M&A of listed firms while the exchange rate volatility degree has a negative.effect.(3)Further,there is a negative effect of exchange rate appreciation and volatility degree on the investment efficiency and efficiency of resource allocation between firms after the cross-border M&A.These results support the short-term profit-driven motivation of acquirers,these cross-border M&A cases would do no favor to the merger synergies implementation,M&A integration and firms' long-term development.Hence,the"valuation advantage hypothesis" play a leading role,rather than "competitive advantage hypothesis" and "exchange rate governance hypothesis".Third,we further explore the additional effect of financial constraints,financing source and payment method on the sensitivity of cross-border M&A to exchange rate fluctuation.The empirical results show that(1)the cross-border M&A propensity of listed firms with financial constraints tends to fall under exchange rate fluctuations,the positive relation between RMB exchange rate appreciation and cross-border M&A decision is more prominent in the firms with lower level of financing constraints.(2)From the perspective of financing for the M&A transaction,debt financing would improve financial performance of cross-border M&A,but worsen the resource allocation efficiency under exchange rate fluctuations.(3)From the perspective of venture capital investing in the acquirer for the transaction,VC could promote the financial performance and total factor productivity of cross-border M&A.(4)From the perspective of payment method,cash payment would positively moderate financial performance under exchange rate fluctuation,but play no significant additional influence on the relation between exchange rate and the total factor productivity,resource allocation efficiency.The innovative points and possible contributions are as follows.First,this paper puts forward the logical framework of the influence of exchange rate fluctuation on cross-border M&A and establishes the mechanism of exchange rate level,exchange rate volatility degree and exchange rate expectation on cross-border M&A decision-making from the perspectives of M&A capability and demand,risk avoidance and real option.present cost and future earnings,respectively.We also further analyze the differences in cross-border M&A efficiency caused by exchange rate fluctuation,through competitive advantage of enterprises,external risk environment,stock market and firm valuation advantage.The existing literature about exchange rate and investment mainly focus on long-term investment scale,the changes in the level or mode of OFDI caused by exchange rate fluctuation.The question that whether and how cross-border M&A is affected by exchange rate has not been solved.Taking cross-border M&A as the research object,this paper extends the study of exchange rate and investment decision-making to exchange rate and investment economic consequences.Second,this paper aims to interpret the phenomenon that time series "peak distribution" of Chinese cross-border M&A frequency and explains the efficiency of valuation-driven cross-border M&A,supplementing the research in existing literature on the topic about the long-term factors on M&A such as geographical or institutional distance,cultural differences,accounting standards,social relations,etc.Third,this paper not only focuses on financial performance of cross-border M&A as previous studies,but also pays attention to total factor productivity,investment efficiency,and resource allocation efficiency around the cross-border M&A,aiming to analyze the comprehensive respects of M&A synergy effect,from both the perspective of actual operation efficiency and resource allocation.This paper aims to provide a theoretical basis for the regulatory authorities to guide Chinese firms to carry out rational and efficient cross-border M&A and lead firms actively adjusting the M&A decision in order to obtain the value increment in a longer horizon.