International Evidence on the Determinants of Foreign Exchange Rate Exposure of Multinational Corporations

In this paper we explore some of the potential determinants of foreign exchange (FX) exposure and firm value. We contribute to previous research on stock returns and firm value as we have access to a unique survey database and can include as determinants in our empirical analysis the objectives and...

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Bibliographic Details
Published in:Journal of international business studies 2005-09, Vol.36 (5), p.539-558
Main Authors: Faff, Robert W., Marshall, Andrew
Format: Article
Language:English
Subjects:
Attitudes
Business management
Business risks
Business structures
Business studies
Cash flow
Economic fluctuations
Exchange rates
Finance
Financial risk
Foreign exchange
Foreign exchange rates
Hedging
International comparisons
International trade
Linear regression
Mathematical models
Multinational corporations
Multinational enterprises
Organization theory
Regions
Research methodology
Risk
Risk management
Studies
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Summary:In this paper we explore some of the potential determinants of foreign exchange (FX) exposure and firm value. We contribute to previous research on stock returns and firm value as we have access to a unique survey database and can include as determinants in our empirical analysis the objectives and emphasis on risk management, as well as considering previous factors including the nature of the business environment. We can also examine any regional influences as our sample includes UK, US and Asia Pacific multinational companies (MNCs). As predicted by theory, we find some evidence that MNCs with greater foreign operations have a larger magnitude of FX exposure. However, our proxy for the emphasis of FX management does not have the predicted negative association with the magnitude of FX, indicating that managers may focus on short-term cash flows in their FX management rather than firm value. With regard to the potentially differential regional role of our variables, a range of interesting results is found. Arguably, in our most notable such finding, we see that the contribution of overseas business to total revenues has no association with the magnitude of FX exposure for US MNCs: it has a positive role for UK MNCs (consistent with theory) and a negative role for Asia Pacific MNCs, which could be explained by macroeconomic and/or financial characteristics of the MNCs in the sample.
ISSN:0047-2506
1478-6990
DOI:10.1057/palgrave.jibs.8400155