Two essays on international corporate finance
The increasing globalization in recent years means that issues related to cross- border transactions have greater impact on firm value. In this paper I examine two aspects of them: asymmetric information and foreign exchange risk. In the first essay, I empirically examine the impact of information asymmetry on characteristics of cross-border mergers. The role of asymmetric information regarding the acquirerís quality is motivated in the context of an entry decision model where there exists a fixed entry cost associated with direct entry and asymmetric information in the merger process. I find that acquisitions will more likely be foreign firmsí mode of entry for those industries that are less competitive or have higher entry costs. Further, I show that acquirers (targets) in cross-border deals experience smaller (larger) wealth gains than do acquir- ers (targets) in domestic cross-industry deals. These differences in takeover premiums are mainly driven by entries into those industries with small fixed entry cost or high level of competition. Finally, I find that target and bidder takeover premiums vary systematically across different industries and bidders from different countries according to the degree of information asymmetry involved. The empirical results imply that asymmetric information affects foreign firmsí mode of foreign direct investment and causes the market to react differently to domestic cross-industry and cross-border mergers in the U.S. In the second essay, I investigate another problem that widely affects all firms in- volved in foreign businesses. That is, I try to explain how much a firmís stock price should be affected the currency risk. Using a sample of U.S. manufactur- ing firms, I find that firms with higher expected costs of financial distress, as proxied by lower liquidity, higher level of short-term leverage, smaller size and greater growth opportunity, are more likely to exhibit significant exchange rate exposures. At the industry level, the relation between exchange rate exposure and expected cost of financial distress appears to be even stronger. Finally, using an event study methodology, I provide evidence that firms with higher expected costs of financial distress show larger reactions to large, unexpected exchange rate shocks.