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Impact of Foreign Exchange Exposure Elasticity on Financial Distress of Firms: A Comparison of Developed and Emerging Economies

Author

Listed:
  • Allah Bakhsh

    (Assistant Professor, Department of Commerce, Bahauddin Zakariya University, Multan, Pakistan.)

  • Syed Zulfiqar Ali Shah

    (Associate Professor, Faculty of Management Sciences, International Islamic University, Islamabad, Pakistan.)

Abstract

This study looks into the potential effect of foreign exchange exposure elasticity (FEEE) on the financial distress of non-financial firms from an emerging country (Pakistan) and a developed country (USA) during 2003-2015. It employs mixed methodology in which a comprehensive quantitative analysis is made from the panel data of the sample companies from both countries (Pakistan and USA). Subsequently, views of Chief Finance Officers (CFOs) of different companies are given. Results show that the effect of foreign exchange exposure is not statistically significant on the financial distress of Pakistani firms at contemporaneous level but it has positive significant effect at lagged level. Results also show that at gross exposure level, foreign exchange exposure of US manufacturing firms has a significantly positive effect on their financial distress contemporaneously but not at net market level. In case of US non-manufacturing firms, the foreign exchange exposure elasticity does not impact significantly on the Z-Score at gross exposure level. But the market model shows a weak significant effect of the FE Exposure on the distress of such firms in USA at relatively higher significance level. The firms fundamental attributes except foreign sales exhibit a significant effect on the financial distress. Only debt has negative coefficient which describes a positive effect on the financial distress. The findings have notable implications for the financial stability of the firms, especially in Pakistan.

Suggested Citation

  • Allah Bakhsh & Syed Zulfiqar Ali Shah, 2018. "Impact of Foreign Exchange Exposure Elasticity on Financial Distress of Firms: A Comparison of Developed and Emerging Economies," Global Social Sciences Review, Humanity Only, vol. 3(1), pages 17-43, March.
    • Handle: RePEc:gss:journl:v:3:y:2018:i:1:p:17-43
    DOI: 10.31703/gssr.2018(III-I).02
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    More about this item

    Keywords

    Foreign Exchange; Exposure Elasticity; Financial Distress; Stability; Financial Crisis; Emerging; Multinational Firms; Chief Finance Officer;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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