Does foreign exchange rate exposure matter? some evidence from UK non-financial companies

This study extends previous research on the foreign exchange rate exposure by investigating exchange rate exposure of UK non-financial companies from January 1981 to December 2001. The study uses different exchange rate measures and adopts a new equally weighted exchange rate. The analyses are
conducted at the firm level. The findings show that a higher percentage of UK non-financial companies are exposed to exchange rate changes than those reported in previous studies. Generally, the results provide a stronger support for the equally weighted, the ECU/£, the JP¥/£ and the US$/£ exchange rates
than the trade-weighted exchange rates as an economic variable which affects firms’ stock returns. The results also show a high proportion of positive exposure coefficients among firms with significant exchange rate exposure, indicating a higher proportion of firms benefiting from an appreciation of the pound. Furthermore, the results indicate that the level of foreign sales and foreign assets are significantly related to exchange rate exposure. Contrary to our expectations, the foreign income ratio variable is insignificant in most models. Additionally, a firm’s size is an important determinant of a firm’s sensitivity to exchange rate exposure. Finally, the results also indicate evidence that hedging variables affect firms’ sensitivity to exchange rate exposure. Firms with higher growth opportunities, higher leverage and lower liquidity have more incentive to hedge, and thereby reduce the firm’s exchange rate exposure.