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Diversification and firm risk: New evidence on exchange rate exposure

Author

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  • Kwon, Taek Ho
  • Bae, Sung C.
  • Liu, Chenyang

Abstract

This study examines the effect of industrial diversification on exchange rate exposure based on the resource-based and portfolio views of corporate diversification. Sampling Korean firms, we report new evidence that once the effect of geographic diversification is controlled and the self-selection bias is corrected, industrial diversification provides a strong positive effect in reducing exchange rate exposure. The mitigating effect of industrial diversification on FX exposure is more pronounced for geographically diversified firms which are in nature highly exposed to FX risk. Our results indicate that industrial diversification helps firms with international operations reduce their exchange rate exposure, supporting the complementary role of industrial diversification in managing FX risk associated with geographic diversification. Our study offers further discussions on potential mechanisms through which industrial and geographic diversification interacts in FX risk reduction.

Suggested Citation

  • Kwon, Taek Ho & Bae, Sung C. & Liu, Chenyang, 2025. "Diversification and firm risk: New evidence on exchange rate exposure," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 101(C).
    • Handle: RePEc:eee:intfin:v:101:y:2025:i:c:s1042443125000484
    DOI: 10.1016/j.intfin.2025.102158
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    Keywords

    Industrial diversification; Geographic diversification; Exchange rate exposure; Korean firms;
    All these keywords.

    JEL classification:

    • 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
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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