Exchange Rate Exposure of Exporting and Importing Firms

Although economic theory and conventional wisdom suggest that U.S. multinationals and export‐oriented firms are adversely affected by a strengthening dollar and benefit from a depreciating dollar, the research to date provides little evidence of any relationship between FX changes and the stock prices of such firms. The authors propose a “dual‐effect” hypothesis that distinguishes between (1) the direct competitive effect of currency induced changes on the effective price to consumers of the firm's products and (2) an indirect effect stemming from the generally positive correlations between currency levels and the strength of the domestic economy. Thus, for example, while a strong dollar hurts exports, it also tends to be associated with a strong domestic market and higher domestic sales. For this reason, the net effect on exporters of a stronger dollar could be close to zero. On the other hand, a weak dollar tends to have a “doubly” negative effect on importers because of higher import prices and the associated weakness of the local economy. For this reason, importers—in contrast to exporters—are likely to have significant exposures to currency fluctuations. Consistent with these arguments, the authors' econometric analysis reveals a significantly positive currency exposure for importers and insignificant exposure for exporters, based on correlations between stock returns and currency changes. But when the benchmark is non‐exporting domestic firms instead of a marketwide index (which contains exporters), a stronger currency is associated with a significantly negative effect on exporters.