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

Research output: Contribution to journalArticle

Abstract

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.
Original languageEnglish
Pages (from-to)136-157
Number of pages22
JournalJournal of International Business and Economics
Volume4
Issue number1
Publication statusPublished - 2005
Externally publishedYes

Fingerprint

Exchange rate exposure
Foreign exchange rates
Exchange rates
Proportion
Liquidity
Stock returns
Hedge
Assets
Coefficients
Hedging
Firm size
Leverage
Income
Economic variables
Incentives
Growth opportunities

Keywords

  • Exchange Rate Changes
  • Exchange Rate Exposure
  • Non-Financial Companies
  • Firm Value
  • Determinants of Exchange Rate Exposure

Cite this

@article{7ae6eaa7d5da417b87dde6d00b3e84f9,
title = "Does foreign exchange rate exposure matter? some evidence from UK non-financial companies",
abstract = "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 areconducted 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 ratesthan 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.",
keywords = "Exchange Rate Changes, Exchange Rate Exposure, Non-Financial Companies, Firm Value, Determinants of Exchange Rate Exposure",
author = "Ahmed El-Masry",
year = "2005",
language = "English",
volume = "4",
pages = "136--157",
journal = "Journal of International Business and Economics",
number = "1",

}

TY - JOUR

T1 - Does foreign exchange rate exposure matter? some evidence from UK non-financial companies

AU - El-Masry, Ahmed

PY - 2005

Y1 - 2005

N2 - 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 areconducted 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 ratesthan 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.

AB - 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 areconducted 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 ratesthan 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.

KW - Exchange Rate Changes

KW - Exchange Rate Exposure

KW - Non-Financial Companies

KW - Firm Value

KW - Determinants of Exchange Rate Exposure

M3 - Article

VL - 4

SP - 136

EP - 157

JO - Journal of International Business and Economics

JF - Journal of International Business and Economics

IS - 1

ER -