Foreign exchange

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.

This study documents the nature of the underlying information that caused investor overreaction and under-reaction. While research has documented the existence of market overreaction and under-reaction, it has not comprehensively addressed the underlying information releases that caused the extreme price fluctuations. This study controls for the underlying announcements, and finds that the degrees of overreaction and under-reaction vary according to the underlying information releases. A primary contribution of this dissertation is the finding that undefined events are associated with higher degrees of overreaction than defined events. The Wall Street Journal Index was used to determine if each event had an announcement that coincided with it. Defined events are those for which an underlying announcement was found in the Wall Street Journal Index. For undefined events, no announcement was found. This finding supports the theory of investor overconfidence and biased self-attribution by Daniel, Hirshleifer, and Subrahmanyam (1998). This study analyzes the overreaction and under-reaction phenomenon in three areas: international securities, domestic securities, and foreign currency. The international securities analyzed are American depository receipts and international closed-end funds. The domestic securities analyzed are financial and non-financial stocks. In the foreign currency area, currencies are classified into two types: emerging country currencies and industrial country currencies. In all of these areas, controlling for the underlying announcements is beneficial in understanding market overreaction and under-reaction. Finally, cross-sectional regression equations are employed to relate post-event returns or exchange rate changes to different variables, such as initial price change, pre-event information leakage, size (market value), month of the year (December or January), day of the week, and announcement type. There is a substantial amount of evidence that suggests larger initial price movements and prevent information leakage are associated with higher degrees of overreaction, and that the tendency towards overreaction is stronger for undefined events.