Exchange rates and target premia in the United States

This paper re-examines the relationship between the target takeover premia and the level of the exchange rate in pure domestic target-domestic bid der takeovers. We estimate the level and nature of exchange rate exposure for 189 U.S. targets between 1990 and 2000 and relate market model cumulative abnormal returns to the type of exposure, firm and bid characteristics. We report that targets that are negatively exposed to exchange rates and are acquired during periods of weak domestic exchange rates have higher premia than similar firms acquired during strong exchange rate periods. Likewise, bidders pay more for positively exposed targets when the exchange rate is strong as compared to other times. The results are robust to several specifications of exchange rate exposure and to the inclusion of control variables traditionally used to explain the cross-sectional variation in target returns. The paper contributes to our understanding of the exchange rate effect by showing that once the direction of the exchange rate exposure is taken into account, exchange rates significantly influence the sign and magnitude of pure domestic target premia.