Exchange rate exposure under liquidity constraints
AbstractWe develop a simple model where exporting firms are characterized by het- erogeneous productivity and may face a liquidity constraint, which in turn is affected by exchange rate changes. This setup is used to analyze exchange rate exposure, i.e. the sensitivity of profits to exchange rate changes, and to derive testable implications that we bring to the data. The key innovation of our setup is to assume that exchange rate changes can either boost or depress liquidity: this allows us to study exposure profits under different scenarios. We find that profits of more productive firms should be more sensitive to ex- change rate fluctuations. Moreover, an increase in the cost of external funds (relative to cash flow) makes profits less sensitive to exchange rate shocks for firms whose liquidity is positively affected by an appreciation of the exchange rate. We test these predictions derived from the model using a large dataset of French exporting firms. Results confirm that exposure tends to increase with productivity but in a non linear way. Furthermore, empirical results confirm that for firm whose cash flow is negatively correlated with exchange rate movements, an increase in financial costs lowers exposure.
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Bibliographic InfoPaper provided by Sciences Po in its series Sciences Po publications with number 2011-13.
Date of creation: Jun 2011
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Find related papers by JEL classification:
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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