Firm-specific factors and the exchange rate exposure of multinational corporations

This dissertation extends previous research on the exchange-rate exposure of multinational corporations. Exchange rate exposure is defined as the impact of unanticipated changes in exchange rates on stock prices. The motivation for the study lies in a fundamental discrepancy between academic research and practice: Academic research has shown that exchange-rate exposure is not priced in capital markets, but the use of financial hedging instruments designed to protect firms from unanticipated changes in exchange rates is widespread. This leads to the conclusion that exchange rate exposure is priced in equity markets and is a function of firm specific factors. This dissertation segregated firms based on various factors that might affect its exchange rate exposure. They are: A firms foreign sales characteristics, the export/import characteristics of the industry to which it belongs, the competitive structure of the firms industry, its business organization and its degree of concentration in sales. The results indicate that firms that operate in the service sector of the economy are more exposed to exchange rate risk than those that operate in the manufacturing sector. On the other hand, the degree of competition among firms in an industry does not have an impact on exchange rate exposure. The results indicate that a firms degree of concentration in foreign sales has an impact on its exchange rate exposure. These results imply that restructuring operations can reduce a firms exchange rate risk. When taken together, the results of the dissertation indicate that exchange rate is exposure is priced in capital markets and is a function of firm specific factors. These results have implications for corporate investors and managers. Corporate investors can choose portfolios that will limit their exchange rate exposure. Corporate managers can make hedging decisions for the firm based on the degree of exposure the firm faces which is a function of who it is and what it does.