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The real effects of exchange rate risk on corporate investment: International evidence

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  • Taylor, Mark P.
  • Wang, Zigan
  • Xu, Qi

Abstract

Through an analysis of over 4,000 multinational firms with foreign exchange (FX) exposures in 44 countries over a 30-year period to 2017, we provide cross-country evidence that greater firm-level unexpected FX volatility leads to significantly lower capital expenditures. The effect is stronger for countries with higher economic openness and for firms that do not use currency derivatives to hedge. We empirically test the implications of two potential driving mechanisms: real options and precautionary savings. Our findings are consistent with both explanations. Two groups of historical events in the FX markets strengthen the identification of our results.

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  • Taylor, Mark P. & Wang, Zigan & Xu, Qi, 2021. "The real effects of exchange rate risk on corporate investment: International evidence," Journal of International Money and Finance, Elsevier, vol. 117(C).
    • Handle: RePEc:eee:jimfin:v:117:y:2021:i:c:s0261560621000838
    DOI: 10.1016/j.jimonfin.2021.102432
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    More about this item

    Keywords

    Exchange rate; Uncertainty; Corporate investment;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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