Private Information and Currency Returns: A Corporate Investment Connection
60 Pages Posted: 2 Nov 2020 Last revised: 14 Jun 2021
Date Written: June 8, 2021
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: Suggested Citation