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Does multinationality matter? Implications of operational hedging for the exchange risk exposure

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  • Choi, Jongmoo Jay
  • Jiang, Cao
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    Abstract

    An important issue in global corporate risk management is whether the multinationality of a firm matters in terms of its effect on exchange risk exposure. In this paper, we examine the exchange risk exposure of US firms during 1983-2006, comparing multinational and non-multinational firms and focusing on the role of operational hedging. Since MNCs and non-multinationals differ in size and other characteristics, we construct matched samples of MNCs and non-multinationals based on the propensity score method. We find that the multinationality in fact matters for a firm's exchange exposure but not in the way usually presumed - the exchange risk exposures are actually smaller and less significant for MNCs than non-multinationals. The results are robust with respect to different samples and model specifications. There is evidence that operational hedging decreases a firm's exchange risk exposure and increases its stock returns. The effective deployment of operational risk management strategies provides one reason why MNCs may have insignificant exchange risk exposure estimates.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 33 (2009)
    Issue (Month): 11 (November)
    Pages: 1973-1982

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    Handle: RePEc:eee:jbfina:v:33:y:2009:i:11:p:1973-1982

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Exchange risk exposure Multinational corporations Corporate risk management Operational hedging Financial hedging;

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    Cited by:
    1. Bredin, Don & Hyde, Stuart, 2011. "Investigating sources of unanticipated exposure in industry stock returns," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1128-1142, May.
    2. Chang, Feng-Yi & Hsin, Chin-Wen & Shiah-Hou, Shin-Rong, 2013. "A re-examination of exposure to exchange rate risk: The impact of earnings management and currency derivative usage," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3243-3257.
    3. Gay, Gerald D. & Lin, Chen-Miao & Smith, Stephen D., 2011. "Corporate derivatives use and the cost of equity," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1491-1506, June.
    4. Thomas Jeanjean & Hervé Stolowy & Michael Erkens, 2010. "Really “Lost in translation”? The economic consequences of issuing an annual report in English," Post-Print hal-00479511, HAL.
    5. Berrill, Jenny & Kearney, Colm, 2010. "Firm-level internationalisation and the home bias puzzle," Journal of Economics and Business, Elsevier, vol. 62(4), pages 235-256, July.
    6. Parlapiano, Fabio & Alexeev, Vitali, 2012. "Exchange Rate Risk Exposure and the Value of European Firms," Working Papers 2012-09, University of Tasmania, School of Economics and Finance, revised 20 Nov 2012.
    7. Hutson, Elaine & Laing, Elaine, 2014. "Foreign exchange exposure and multinationality," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 97-113.

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