The FX exposure puzzle: insights from SEC disclosures

Purpose - Using firm-specific SEC currency risk disclosures, this paper aims to provide insight into the puzzling absence of significant returns-based foreign exchange exposure (FXE). Such a hand gathered disclosure data identify the bilateral exchange rate to which the firm is most vulnerable (BRV)...

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Bibliographic Details
Published in:Managerial finance 2013-03, Vol.39 (4), p.342-361
Main Authors: Makar, Stephen, Huffman, Stephen
Format: Article
Language:English
Subjects:
American dollar
Currency
Economic models
Estimates
Foreign exchange rates
Hedging
Multinational corporations
R&D
Research & development
Stock exchanges
Studies
Theory
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Summary:Purpose - Using firm-specific SEC currency risk disclosures, this paper aims to provide insight into the puzzling absence of significant returns-based foreign exchange exposure (FXE). Such a hand gathered disclosure data identify the bilateral exchange rate to which the firm is most vulnerable (BRV) and the firm's FX hedge techniques.Design methodology approach - The BRV-based estimates of FXE are compared to the FXE estimates using the broad trade-weighted index (TWI) data that are prevalent in prior research. Multivariate regression and sample partitioning by level of value and size premiums are used to analyze these alternative FXE estimates.Findings - The univariate results reveal a higher percentage of firms with significant BRV-estimated FXE compared to TWI-estimated FXE. Multivariate tests indicate a negative relation between firm-specific financial hedging and BRV-estimated FXE (but not TWI-estimated FXE), controlling for firm-specific non-financial operational hedging, size and industry effects. Moreover, firms in the first and fifth quintiles for measures of value growth and size have higher levels of FXE.Practical implications - Using SEC currency risk disclosures improves the analysis of firm-specific FXE, allowing investors to better estimate risk and cost of capital.Originality value - The paper helps resolve the FX exposure puzzle using a unique dataset of firm-specific currency risk disclosures. The improved estimates of FXE provide a more detailed risk profile of multinational firms.
ISSN:0307-4358
1758-7743
DOI:10.1108/03074351311306175