Financial Structure and China's Outbound Mergers and Acquisitions

In this paper, we plan to investigate the most cost-effective way for Chinese companies to finance their overseas merger and acquisition (M&A) activities. Based on the model we developed, we show that Chinese acquiring firms can gain the most by financing the acquisition with US dollar loan. However, such a strategy will expose the company to exchange rate risk. Companies with huge cash reserves should have proper governance in place to curb the desire to grow at all cost and thus avoiding the Japan's "Lost Decade" mistake. We will also give some suggestions on the means of payment for the optimum way for Chinese firms to finance their overseas M&A activities.