Cross-Border M&A Flows, Economic Growth, and Foreign Exchange Rates

We extract expectations about future economic growth from firms' cross-border merger and acquisition (M&A) announcements, and show they predict changes in economic growth rates and foreign exchange rate returns. The predictability is driven by the cross-border M&A announcements of cyclical domestic firms, which signal turning points in local economic conditions. The findings are motivated via a simple model of exchange rate determination with heterogeneous expectations and support the theorized connection between foreign exchange rates and macroeconomic fundamentals. The results provide new tools for policy makers concerned with predicting economic activity and offer global investors a novel source of portfolio diversification