Cross-Border Spillovers: How U.S. Monetary Conditions Affect M&As Around the World

Layer 1: Overview

This paper examines how unexpected changes in U.S. monetary policy transmit to cross-border merger and acquisition (M&A) activity globally, covering both the volume of deals and their quality as measured by acquirer stock price reactions. The motivation is threefold: M&As represent a large, discrete form of capital reallocation with measurable quality proxies (announcement returns); their financing structure makes them especially sensitive to balance-sheet conditions; and cross-border deals offer a clean lens on international spillovers from core-country monetary policy.

The country-level analysis draws on SDC Platinum data covering 560,118 completed deals from over 180 economies between 2000 and 2019, representing US$41.1 trillion in combined transaction value, with cross-border deals accounting for 32.6% of the total (approximately US$13.4 trillion). The firm-level analysis uses the ORBIS M&A database, covering 311,485 completed deals from 164,891 acquirer firms across 177 countries. The key exogenous variable is the Iacoviello and Navarro (2019) annual U.S. monetary policy shock series, which isolates unexpected changes in the federal funds rate by stripping out systematic Taylor-rule responses to macroeconomic conditions. Foreign currency (FX) liability exposure is constructed from SDC Loans and Bonds data at the country level (flows of non-financial corporate FX bond and loan issuance, averaging 13.4% of GDP) and at the firm level by applying the country-level FX debt share to ORBIS balance-sheet totals (averaging 8.3% of assets). Identification rests on bilateral country-pair fixed effects (absorbing persistent bilateral determinants such as language, geography, and income), year fixed effects, and the interaction between firm-level FX exposure and an externally constructed, disaggregated macro shock, making reverse causality unlikely.

Main quantitative findings: (1) A 100-basis-point unexpected tightening in U.S. monetary policy is associated with a 7.3% decline in the total value of cross-border M&A deals and a 1.3% decline in deal count. The larger response in value than count implies that large transactions are disproportionately affected. These effects hold when U.S.-involved pairs are excluded, confirming genuine third-country spillovers. (2) The transmission is amplified by FX liabilities through a net worth channel: when U.S. policy tightens, the dollar appreciates, raising the local-currency value of foreign-currency debt and eroding acquirer net worth. A one percentage point tightening is associated with an estimated decline in cross-border M&A activity of approximately 0.83% for an acquirer country at the 25th percentile of FX liabilities (e.g., Brazil or Portugal), compared to more than 5.21% for a country at the 75th percentile (e.g., Belgium or Tunisia). (3) At the firm level, a one percentage point monetary tightening reduces the probability of a cross-border acquisition by approximately 1.5 percentage points for a firm at the 25th percentile of FX debt-to-assets, compared to 2.5 percentage points for a firm at the 75th percentile — a difference of about 1 percentage point attributable purely to FX exposure heterogeneity. (4) Replacing monetary policy shocks with U.S. NEER changes produces consistent results: a one-unit dollar appreciation has no significant effect at the 25th FX percentile firm but reduces the probability of cross-border M&A by about 5.9 percentage points at the 75th percentile. (5) Domestic M&A activity is not significantly affected by U.S. monetary shocks (confirming the channel operates through FX exposure), while domestic policy rates depress domestic deal value by approximately 2.7% per percentage point of tightening. (6) U.S. monetary policy shocks dominate euro-area shocks: when both are included together, U.S. monetary policy shock × acquirer FX liabilities remains negative and highly significant, while the euro-area interaction becomes small and insignificant. (7) For deal quality: tighter U.S. monetary conditions are associated with higher acquirer abnormal returns across all announcement horizons and both full-sample and cross-border subsamples. Predicted announcement returns are strongly negative when monetary policy is most accommodative and rise monotonically as policy tightens — consistent with a screening interpretation in which tight financial conditions select for value-creating deals and easy conditions enable empire-building.

The dual pattern — easier U.S. conditions increase both deal volume and deal underperformance — points to capital misallocation: loose monetary spillovers generate more cross-border acquisitions, but those acquisitions on average destroy acquirer shareholder value. The policy implication is not to restrict cross-border M&As but to heighten macro-prudential attention to corporate leverage and asset quality when global financing conditions are accommodative. The results also provide an additional rationale for emerging market central bank exchange rate smoothing as a macro-prudential tool, insofar as limiting currency appreciation under global easing cycles may restrain unsound debt-financed acquisitions.

Layer 2: Deep Dive

What is the identification strategy and what are the main threats to it?

The country-level strategy uses bilateral country-pair fixed effects to absorb all time-invariant drivers of cross-border M&A (geography, language, bilateral treaties, income) and interacts the Iacoviello-Navarro U.S. monetary policy shock — constructed as Taylor-rule residuals, thus exogenous to any individual country’s conditions — with lagged country-level FX liabilities. Year fixed effects are included in some specifications. The firm-level strategy adds firm fixed effects (controlling for all time-invariant firm-level heterogeneity) and, in the most demanding specification, acquirer country-by-year fixed effects (absorbing all time-varying local macroeconomic conditions). The main threats addressed are: (1) Reverse causality — firms are too small relative to the U.S. monetary policy setting to affect the shock; (2) Endogeneity of FX liabilities — the firm-level proxy applies a country-average FX debt ratio from SDC to ORBIS balance-sheet totals, not firm-specific borrowing choices, so it reflects economy-wide currency borrowing patterns rather than individual strategic decisions; (3) Domestic monetary policy confounding — including acquirer and target short-term policy rates and their interactions with FX liabilities leaves the U.S. shock coefficient essentially unchanged; (4) Valuation effects — results hold for deal count as well as deal value; (5) Tax/regulatory arbitrage — results hold after dropping transactions involving tax-haven jurisdictions (about 2.6% of country-level and about 12,113 of firm-level observations).

What is the net worth channel and how is it distinguished empirically from other potential channels?

The net worth channel, formalized in Diamond, Hu, and Rajan (2020), operates as follows: easier U.S. monetary conditions cause the dollar to depreciate (or non-dollar currencies to appreciate), reducing the local-currency value of foreign-currency-denominated debt and thereby increasing the net worth of firms that borrowed in dollars or other foreign currencies. Higher net worth expands borrowing capacity (financing becomes asset-based and procyclical) and enables acquisitions. The converse holds when U.S. policy tightens. The empirical distinction from a pure interest-rate-level channel is provided by the interaction between U.S. monetary shocks and firm-level FX liabilities: if the channel were simply the global cost of capital, all firms should respond equally regardless of their FX debt share. The significantly negative interaction term — consistent across country-level and firm-level specifications — specifically implicates balance-sheet exposure rather than a generic credit-conditions effect. The channel is also distinguished from domestic monetary transmission by the finding that domestic policy rates matter for domestic deals but not cross-border deals, while U.S. shocks matter for cross-border deals but not domestic ones (when interaction effects are examined). Dollar appreciation effects (using U.S. NEER) mirror the monetary shock results and directly capture the exchange-rate leg of the net worth channel.

What heterogeneity is documented across countries and firms?

Country-level heterogeneity: The sensitivity of cross-border M&A to U.S. tightening rises sharply with the level of corporate FX liabilities. A country at the 25th percentile of net FX liabilities (e.g., Brazil or Portugal) sees about 0.83% decline per pp of tightening, versus more than 5.21% for a country at the 75th percentile (e.g., Belgium or Tunisia). This pattern holds whether FX liabilities are measured with SDC, IMF, or BIS data, and for both total FX liabilities and USD-only liabilities (with the dollar-specific measure showing even more pronounced heterogeneity). Advanced economies dominate global M&A by value (approximately $34.9 trillion or 85%), with the U.S. alone at $17.6 trillion, but the spillover mechanism is documented beyond U.S.-involved pairs. Firm-level heterogeneity: Serial acquirers (firms with three or more deals in the sample) also show significant sensitivity to U.S. monetary conditions interacted with FX debt, indicating the effect is not limited to one-time acquirers. Firms in tradable sectors (agriculture, mining, manufacturing) show no significantly different response from firms in non-tradable sectors. U.S. acquirers show weaker sensitivity, consistent with their borrowing in domestic currency. The FX exposure effect is concentrated on acquirer-side balance sheets; target-country FX liabilities show point estimates in the same direction but are not robustly significant, suggesting the main transmission operates through acquirer finance rather than target-country conditions.

What is the evidence on deal quality and how is it measured?

Deal quality is measured by market-adjusted acquirer excess returns (abnormal returns) over horizons of one to four quarters following the M&A announcement, benchmarked against a country-specific equity index from Global Financial Data. The stock price reaction to the announcement is used as a proxy for the expected quality of the investment at the time, based on the reasoning that acquisitions involve substantial, relatively immediate, and difficult-to-reverse financial commitments, making the announcement return a reliable contemporaneous signal. The specification regresses acquirer abnormal returns on lagged U.S. monetary policy shocks, controlling for acquirer fixed effects, country fixed effects, or no fixed effects, across the full deal sample and the cross-border subsample. Findings: coefficients on U.S. monetary policy shocks are consistently positive and statistically significant across all specifications and horizons, meaning tighter conditions predict higher acquirer excess returns. Figure 5 shows that predicted returns are strongly negative when monetary policy is most accommodative, remain negative through much of the shock distribution, and rise monotonically into positive territory as policy tightens. The interpretation offered is a screening effect: high financing costs filter out low-quality empire-building acquisitions, while easy conditions lower the bar for what gets financed. This quality degradation under easy conditions, combined with higher deal volumes under easy conditions, constitutes the capital misallocation finding.

What robustness checks are run at both country and firm levels?

Country-level robustness: (1) Replication with deal count instead of deal value to rule out pure valuation effects — results are qualitatively the same. (2) Restricting to ’established markets’ (roughly 80 countries with at least 10 serial acquirers), which yields a larger effect magnitude (8.1% decline in value per 100bps). (3) Replacing SDC FX liabilities with IMF IIP and BIS Locational Banking Statistics measures — results remain qualitatively similar. (4) Including domestic short-term policy rates and their interactions with FX liabilities — the U.S. shock interaction coefficient is essentially unchanged. (5) Comparing U.S. versus euro-area monetary policy shocks — U.S. shock dominates; EA shock becomes insignificant when both are included. (6) Excluding tax-haven jurisdictions (about 2.6% of observations) — results consistent with baseline. (7) Lagging the monetary policy variable by one year and FX liabilities by two years — results qualitatively similar though standard errors increase. Firm-level robustness: (1) Linear probability model on the full sample of ~686,000 firm-year observations (compared to the conditional logit on ~170,000 with within-firm variation) — key findings hold. (2) Using non-current FX liabilities instead of total FX debt — results remain statistically significant. (3) Constructing firm-level FX debt from BIS data following Kalemli-Ozcan et al. (2021) — results consistent though significant only at 10% level due to smaller country coverage. (4) Adding domestic policy rates — U.S. shock remains dominant; domestic rates and their FX interactions are insignificant for cross-border deals. (5) Extending to domestic M&A firm-level regressions — the U.S. shock × FX liabilities interaction is significant even for domestic deals (though the direct U.S. shock effect is not), suggesting the balance-sheet channel extends to within-country activity once the interaction is isolated. (6) Testing tradable vs. non-tradable sectors — no significantly different response; results hold across sectors.

How does this paper relate to and differ from Erel, Liao, and Weisbach (2012) and other closely related prior work?

Erel et al. (2012) is the closest antecedent. It analyzes persistent bilateral determinants of cross-border M&A (language, geography, treaty status, relative valuation via exchange rate and stock market appreciation), finding that acquirer-country exchange rate and stock market appreciation increases cross-border acquisitions toward that country’s firms as targets. The current paper uses bilateral fixed effects to absorb those persistent determinants and focuses on the time-series variation driven by an exogenous, externally constructed U.S. monetary policy shock interacted with balance-sheet FX exposure. The mechanism differs: rather than exchange-rate-driven valuation effects per se, the paper emphasizes net worth through the FX liability channel, distinguishing it from a pure relative-price view of cross-border M&A flows. Relative to di Giovanni (2005), which found that domestic financial development drives M&A outflows in the 1990s, this paper focuses on global monetary conditions since 2000. Relative to Diamond et al. (2020), the paper takes the theoretical net worth channel to a global empirical test using actual M&A data and adds the misallocation angle via announcement returns. The paper also extends previous work on FDI and capital flow misallocation by documenting misallocation specifically through M&A quality (announcement returns), which prior literature did not analyze. Other exchange-rate papers (Pelli 2018; Fransson 2010; Georgopoulos 2008) focus on the direct exchange rate level rather than the mechanism running through FX-debt net worth.

What are the policy implications and their scope conditions?

Three sets of implications are discussed. First, cross-border M&A inflows to a country should not be interpreted as an unambiguous signal of that country’s economic strength or attractiveness; a significant portion of the time-series variation reflects monetary conditions in core countries rather than local fundamentals. Second, easy monetary conditions at the core can generate a legacy of overleveraged corporates in non-core countries: firms increase FX debt during accommodative periods to finance acquisitions that often destroy value, then face balance-sheet stress when core conditions tighten. The authors suggest this is especially concerning because the activity being financed — acquisitions — has highly uncertain productivity benefits. The regulatory implication is heightened macro-prudential attention to corporate leverage and acquisition activity during periods of global monetary ease, not an outright ban on cross-border M&A. Third, the results offer an additional rationale for emerging market central bank exchange rate smoothing: by dampening the appreciation of domestic currencies during easy global conditions, central banks may limit the net worth expansion that fuels excessive FX-debt-financed acquisitions, adding a macro-prudential dimension to what is often framed as a pure competitiveness or capital-flow management motive. Scope conditions: results are based on 2000–2019 data, so the sample predates major post-2019 shocks; effects are most pronounced for acquirers with above-median FX liabilities and may be less relevant for domestic-currency borrowers (including U.S. firms); the quality evidence uses announcement returns, which measure market expectations at announcement rather than realized post-merger performance.

What does the paper find about the U.S. dollar’s special role versus the euro’s role?

The paper directly tests whether the U.S. is distinctive among reserve-currency issuers by constructing euro-area (EA) monetary policy shocks using a parallel methodology (ECB shadow rate, Taylor-rule residuals, following the spirit of Iacoviello and Navarro 2019). When EA shocks alone are considered, the interaction between EA monetary policy shocks and acquirer FX liabilities is negative but only marginally significant. When both U.S. and EA shocks are included simultaneously, the U.S. shock × acquirer FX liabilities interaction is negative and highly significant while the EA equivalent becomes small and statistically insignificant. Interactions involving target-country FX liabilities are not significant for either shock. The authors interpret this as consistent with the dominant international role of the U.S. dollar: because much global corporate FX borrowing is in dollars, U.S. monetary conditions are the primary driver of net worth through the FX channel, while euro-area policy has at best weak independent effects once U.S. conditions are controlled for.

What are the data limitations and caveats?

Several limitations are acknowledged. First, deal value is missing for 61.4% of observations in the SDC country-level data and 65.6% in the ORBIS firm-level data, likely concentrated in smaller private transactions. The paper addresses this by treating year-zeros for country pairs that have previously reported positive deal values as genuine zeros rather than missing, but this assumption may introduce noise. Second, the firm-level FX liability measure is a proxy constructed by applying a country-level FX debt share to firm-level total liabilities from ORBIS (because ORBIS M&A data do not record currency denomination of debt and there are no unique identifiers to link individual firms to SDC). This introduces measurement error but arguably also reduces endogeneity from firm-specific borrowing decisions. Third, the stock return analysis is restricted to 2010–2019 because of data availability from ORBIS and GFD, a shorter window than the 2000–2019 M&A sample. Fourth, the paper does not track post-merger performance over time (only announcement returns), leaving open whether deals that look poor at announcement do in fact underperform over multi-year horizons. Fifth, because targets typically exit the dataset after acquisition, the authors cannot build a target-firm panel, limiting firm-level analysis to the acquirer side. The authors flag data on FX exposure of the corporate sector as an important area for improvement and note that examining acquisition-induced leveraging dynamics over time is an avenue for future research.

What is the take-away for the global financial cycle literature?

The paper contributes to the ‘global financial cycle’ tradition (Rey 2013; Kalemli-Ozcan 2019) by documenting a specific and previously under-studied channel through which U.S. monetary conditions affect real investment decisions globally: corporate control reallocation via M&A, operating through the net worth of foreign-currency borrowers. Unlike studies focused on cross-border lending or portfolio flows, M&A data provide a direct proxy for investment quality (announcement returns), allowing the authors to move beyond documenting that spillovers exist to showing that they have welfare-relevant misallocation consequences. The dominance of U.S. over EA shocks in driving this channel is consistent with the dollar’s hegemonic role in global corporate borrowing (Maggiori, Neiman, and Schreger 2020). The paper also complements the macro-prudential angle in Diamond et al. (2020) and Hofmann et al. (2019) by showing that asset-based borrowing during easy monetary periods generates procyclical M&A activity that underperforms when measured by market expectations at announcement.

Key Concepts

Net worth channel (of monetary policy spillovers): As used in this paper (building on Diamond, Hu, and Rajan 2020): the mechanism by which U.S. monetary easing causes the dollar to depreciate, raising the local-currency net worth of non-U.S. firms with dollar- or foreign-currency-denominated liabilities, expanding their borrowing capacity on an asset-based basis and enabling additional acquisitions. Conversely, U.S. tightening appreciates the dollar, erodes net worth, and reduces cross-border acquisition activity — especially for firms with large FX debt.

FX liabilities (foreign currency liabilities): In this paper, debt obligations denominated in a currency other than the borrower’s domestic currency. Measured at the country level using SDC bond and loan issuance data (flow-based, non-financial corporates only, averaging 13.4% of GDP), and at the firm level by applying that country-level FX debt share to ORBIS balance-sheet total liabilities (averaging 8.3% of assets). The key heterogeneity variable: firms and countries with higher FX liabilities exhibit amplified sensitivity to U.S. monetary shocks.

Acquirer excess (abnormal) return: Market-adjusted stock return of the acquiring firm over one-to-four quarters following the M&A announcement date, computed as the acquirer’s raw return minus the contemporaneous country-specific equity index return from Global Financial Data. Used as a contemporaneous market signal of expected deal quality; a negative abnormal return at announcement is interpreted as the market assessing the acquisition as value-destroying.

Capital misallocation (via monetary spillovers): As documented in this paper: the joint pattern in which accommodative U.S. monetary conditions generate both more cross-border M&A transactions and lower-quality transactions (negative acquirer announcement returns), implying that easy financing conditions direct resources toward acquisitions that destroy rather than create value. The paper does not measure misallocation in terms of productivity dispersion across firms but in terms of the gap in deal quality between loose- and tight-monetary-condition periods.

Monetary policy shock (Iacoviello-Navarro): An annual, exogenous measure of unexpected changes in U.S. monetary policy, constructed by Iacoviello and Navarro (2019) as the residuals from regressing the federal funds rate on a standard set of macroeconomic controls (a Taylor-rule approach). The shock captures the component of policy change that is not explained by systematic responses to inflation, output, or other macro variables, allowing the authors to treat it as exogenous to conditions in any individual non-U.S. country.

Screening effect (of tight monetary conditions): The paper’s interpretation of why tighter U.S. conditions predict higher acquirer announcement returns: when financing is expensive and difficult to obtain, firms pursue only acquisitions with clear strategic or synergistic rationale, so the average deal quality is higher. Conversely, in liquidity-abundant environments, managerial agency problems (empire-building, growth-for-growth’s-sake) face fewer financial constraints, leading to value-destroying acquisitions that pass the financing test.

Cross-border M&A (as a distinct investment form): As framed in this paper: an acquisition in which the acquirer and target are headquartered in different countries, resulting in a change of control. Distinct from greenfield FDI (new asset creation) and from portfolio equity flows in that it involves immediate, large capital commitments, usually accompanied by significant leverage taken on by the acquirer, with a measurable contemporaneous quality signal (announcement return). The authors restrict the sample to control-transfer transactions (majority stake, excluding LBOs, spin-offs, recapitalizations, partial stakes, and privatizations).