Private Information and Currency Returns: A Corporate Investment Connection

60 Pages Posted: 2 Nov 2020 Last revised: 14 Jun 2021

See all articles by Steven Riddiough

Steven Riddiough

University of Toronto - Rotman School of Management; University of Toronto at Scarborough - Division of Management

Huizhong Zhang

Queensland University of Technology - School of Economics and Finance

Date Written: June 8, 2021

Abstract

We uncover a novel source of predictive information, originating from the announcements of cross-border mergers and acquisitions (M&As), that forecasts economic acceleration and currency returns. Consistent with the announcements revealing firms' private expectations about economic fundamentals, we find that a country's economic growth accelerates, and their local currency appreciates, following months in which their announced cross-border M&A net inflows are abnormally high; while the opposite outcomes are observed following abnormally high M&A net outflows. The predictability captures reversals in economic acceleration and is driven by the acquisition decisions of domestic firms. A currency portfolio that exploits the predictability is found to generate a Sharpe ratio of over 0.70 and to offer large diversification gains to global currency investors.

Keywords: currency returns, private information, cross-border mergers and acquisitions, exchange rate determination, economic acceleration

JEL Classification: F31, G12, G15

Suggested Citation

Riddiough, Steven and Zhang, Huizhong, Private Information and Currency Returns: A Corporate Investment Connection (June 8, 2021). Available at SSRN: https://ssrn.com/abstract=3711715 or http://dx.doi.org/10.2139/ssrn.3711715

Steven Riddiough (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

University of Toronto at Scarborough - Division of Management ( email )

1265 Military Trial
Scarborough, Ontario M1C 1A4
Canada

Huizhong Zhang

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

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