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International evidence on the determinants of foreign exchange rate exposure of multinational corporations

Author

Listed:
  • Robert W Faff

    (Department of Accounting and Finance, University of Strathclyde, Glasgow, Scotland, UK)

  • Andrew Marshall

    (Department of Accounting and Finance, University of Strathclyde, Glasgow, Scotland, UK)

Abstract

In this paper we explore some of the potential determinants of foreign exchange (FX) exposure and firm value. We contribute to previous research on stock returns and firm value as we have access to a unique survey database and can include as determinants in our empirical analysis the objectives and emphasis on risk management, as well as considering previous factors including the nature of the business environment. We can also examine any regional influences as our sample includes UK, US and Asia Pacific multinational companies (MNCs). As predicted by theory, we find some evidence that MNCs with greater foreign operations have a larger magnitude of FX exposure. However, our proxy for the emphasis of FX management does not have the predicted negative association with the magnitude of FX, indicating that managers may focus on short-term cash flows in their FX management rather than firm value. With regard to the potentially differential regional role of our variables, a range of interesting results is found. Arguably, in our most notable such finding, we see that the contribution of overseas business to total revenues has no association with the magnitude of FX exposure for US MNCs: it has a positive role for UK MNCs (consistent with theory) and a negative role for Asia Pacific MNCs, which could be explained by macroeconomic and/or financial characteristics of the MNCs in the sample. Journal of International Business Studies (2005), 36, 539–558. doi:10.1057/palgrave.jibs.8400155

Suggested Citation

  • Robert W Faff & Andrew Marshall, 2005. "International evidence on the determinants of foreign exchange rate exposure of multinational corporations," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 36(5), pages 539-558, September.
  • Handle: RePEc:pal:jintbs:v:36:y:2005:i:5:p:539-558
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    Citations

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    Cited by:

    1. Hagigi, Moshe & Sivakumar, Kumar, 2009. "Managing diverse risks: An integrative framework," Journal of International Management, Elsevier, vol. 15(3), pages 286-295, September.
    2. repec:pal:jintbs:v:49:y:2018:i:1:d:10.1057_s41267-017-0090-z is not listed on IDEAS
    3. Huffman, Stephen P. & Makar, Stephen D. & Beyer, Scott B., 2010. "A three-factor model investigation of foreign exchange-rate exposure," Global Finance Journal, Elsevier, vol. 21(1), pages 1-12.
    4. repec:lje:journl:v:23:y:2018:i:1:p:51-77 is not listed on IDEAS
    5. Choi, Jongmoo Jay & Jiang, Cao, 2009. "Does multinationality matter? Implications of operational hedging for the exchange risk exposure," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 1973-1982, November.
    6. Chung, Hyunchul & Majerbi, Basma & Rizeanu, Sorin, 2015. "Exchange risk premia and firm characteristics," Emerging Markets Review, Elsevier, vol. 22(C), pages 96-125.
    7. Joseph, Nathan Lael & Lambertides, Neophytos & Savva, Christos S., 2015. "Short-horizon excess returns and exchange rate and interest rate effects," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 37(C), pages 54-76.
    8. repec:wsi:rpbfmp:v:20:y:2017:i:04:n:s0219091517500230 is not listed on IDEAS

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