Various studies have shown that exchange rate exposure is empirically lower for US multinationals than theory predicts. We examine this discrepancy for the largest Eurozone companies from 1994 till 2010 where the introduction of the Euro could have led to significant exposure reduction.
Furthermore, we examine the relationship between exchange rate exposure and transnationality which is a novelty to date. We find that few European multinationals seem to have a significant exchange rate exposure and surprisingly the overall risk profile of transnational companies is lower which indicates that the risk from exchange rate exposure is more than compensated by risk reducing effects resulting from a high degree of transnationality.
Table of Contents
ABSTRACT
INTRODUCTION
LITERATURE REVIEW
HYPOTHESES
DATASET
ANALYSIS
CONCLUSIONS
REFERENCES
Research Objectives and Key Themes
This paper investigates the relationship between exchange rate exposure and transnationality for the largest Eurozone companies listed in the EURO STOXX 50 index between 1994 and 2010. The core research aim is to determine if higher degrees of international operations lead to increased exchange rate risk and to address the "exchange rate exposure puzzle" within the European context, including the role of financial corporations.
- Analysis of exchange rate exposure for European blue-chip corporations.
- Impact of the introduction of the Euro on exposure reduction.
- Investigation of the relationship between transnationality and exchange rate risk.
- Comparative study of financial and non-financial firm exposures.
- Evaluation of hedging strategies and market power as mitigating factors.
Excerpt from the Book
LITERATURE REVIEW
As said in the introduction, several authors have discussed and studied the exchange rate exposure of multinational firms. Jorion (1990) was one of the first to question why the association between exchange rates and the value of the firm has not been empirically studied upon. Jorion (1990) found significant differences in exchange rate risk correlated to the foreign involvement of the firms. He concluded that there is a (small) positive correlation between exchange rate exposure and foreign involvement, and that this exposure influenced the value of exposed US firms. His findings, however, are not aligned with theoretical exposure estimates as he found only 5.2 percent of the sample had a significant exchange rate exposure, which according to Bartram & Bodnar (2007) is just ‘little more than by pure chance’.
Firms that are internationally operating should, in theory, have higher exchange rate risk, since they are exposed to different currencies and are therefore more influenced by unexpected exchange rate changes. Unfortunately, empirical studies were never able to measure statistically significant exposure for most multinational firms and only weak relationships between exchange rate changes and the value of the firm, which is measured by the firm’s stock prices, were found. This problem is also called the ‘exchange rate exposure puzzle’ (Bartram and Bodnar, 2007). Its existence lies in the fact that companies with high levels of operations, assets or competition outside their foreign-currency domain are advised to hedge the exchange rate risk through operations, financing activities or both. We need to take this into account and control for the ‘exchange rate exposure puzzle’ when analyzing the exposure of the ES50 firms.
Summary of Chapters
INTRODUCTION: Outlines the research gap concerning exchange rate exposure in European companies and defines the scope of using EURO STOXX 50 constituents from 1994 to 2010.
LITERATURE REVIEW: Discusses existing academic studies on exchange rate exposure, the "exposure puzzle," and the theoretical models used to measure firm sensitivity to currency fluctuations.
HYPOTHESES: Establishes the expected relationships between transnationality, geographical spread, and firm-specific exchange rate exposure, while introducing specific hypotheses for testing.
DATASET: Details the methodology for collecting monthly stock return data and computing trade-weighted exchange rate changes for the Euro area.
ANALYSIS: Presents the statistical regression results of stock betas against transnationality indices, discussing the impact of the 2008 financial crisis and the effectiveness of hedging.
CONCLUSIONS: Summarizes the key findings, noting that no statistically significant evidence links higher transnationality to increased exchange rate exposure for these European firms.
Keywords
Exchange rate exposure, Eurozone, EURO STOXX 50, Transnationality Index, Geographical Spread Index, Financial corporations, Hedging, Market power, Stock price volatility, Corporate finance, Multinational firms, Currency risk, Economic diversification, Regression analysis, Exposure puzzle.
Frequently Asked Questions
What is the fundamental focus of this research paper?
The paper examines the empirical relationship between exchange rate movements and the stock market value of the largest European corporations (constituents of the EURO STOXX 50 index) from 1994 to 2010.
What are the primary themes addressed in the study?
The study covers exchange rate risk, the impact of multinationality on firm value, the effectiveness of corporate hedging strategies, and the differences in exposure between financial and non-financial sectors.
What is the central research question?
The research seeks to determine whether a higher degree of international operation (transnationality) leads to increased exchange rate exposure and if this impact is reflected in the firms' stock price sensitivity.
Which scientific methodology is employed?
The authors use monthly price index data to calculate asset betas and perform simple OLS regressions of stock returns against changes in the trade-weighted exchange rate index.
What is covered in the main body of the paper?
The main body includes a literature review of the "exchange rate exposure puzzle," the formulation of hypotheses, an explanation of the dataset collection, and a detailed statistical analysis of exposure coefficients across different industries.
Which keywords best characterize this work?
Key terms include Exchange rate exposure, Transnationality, EURO STOXX 50, Hedging, Financial corporations, and Market power.
Did the study find a clear link between transnationality and exchange rate exposure?
No, the empirical results rejected the hypothesis; there was no significant evidence that higher transnationality leads to higher exchange rate exposure in the analyzed European sample.
Why were financial companies included in this research?
The authors included financial firms because they possess large international operations, a factor often excluded in previous studies, which focused primarily on manufacturing and export-oriented firms.
- Quote paper
- Sascha Seiler (Author), Bertjan van den Berg (Author), José de Bruin (Author), 2011, International Financial Management: Exchange Rate Exposure revisited, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/197087
