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How Do Investors and Firms React to a Large, Unexpected Currency Appreciation Shock?

Author

Listed:
  • Matthias Efing
  • Rüdiger Fahlenbrach
  • Christoph Herpfer
  • Philipp Krueger

Abstract

Past research has suggested that firms can significantly reduce their exposure to moderate exchange rate fluctuations by means of pass-through and hedging. Studying the appreciation of the Swiss franc by 17% on January 15, 2015, we show that firms remain exposed to extreme currency events. Pass-through, a way to share the costs of exchange rate risk with foreign customers, fails after extreme exchange rate shocks, particularly in competitive industries. Firms’ exposure to currency tail risk has real consequences for their investment. The decrease in investment is explained by a reduction in profitable investment opportunities and not by financial constraints. (JEL G15, G32, F30, F31, E58)Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Matthias Efing & Rüdiger Fahlenbrach & Christoph Herpfer & Philipp Krueger, 2023. "How Do Investors and Firms React to a Large, Unexpected Currency Appreciation Shock?," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 12(3), pages 488-538.
    • Handle: RePEc:oup:rcorpf:v:12:y:2023:i:3:p:488-538.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfac024
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    More about this item

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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