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Operational Currency Mismatch and Firm Level Performance: Evidence from India

  • Dhasmana, Anubha
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    This paper looks at the determinants and effects of exchange rate exposure using data on 500 Indian firms over the period 1995-2011. Unlike the existing papers in the literature, we use a measure of `operational` currency exposure based on foreign currency revenues and costs of firms. Among other factors, exchange rate volatility appears as a significant determinant of average firm level exposure with the direction of relationship supporting the presence of `Moral Hazard` in firm’s risk taking behavior. Further large `operational` exposure is associated with significantly lower output growth, profitability and capital expenditure during episodes of large currency depreciation at the firm level. Together this indicates that the policy makers must take into account the incentive effects of their intervention in foreign exchange markets.

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    File URL: http://mpra.ub.uni-muenchen.de/47935/1/MPRA_paper_47935.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 47935.

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    Date of creation: 01 Jun 2013
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    Handle: RePEc:pra:mprapa:47935
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    1. Patnaik, Ila & Shah, Ajay, 2008. "Does the currency regime shape unhedged currency exposure," Working Papers 08/50, National Institute of Public Finance and Policy.
    2. Michael M. Hutchison & Ilan Neuberger, . "How Bad Are Twins? Output Costs of Currency and Banking Crises," EPRU Working Paper Series 02-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    3. Campa, Jose & Goldberg, Linda S., 1995. "Investment in manufacturing, exchange rates and external exposure," Journal of International Economics, Elsevier, vol. 38(3-4), pages 297-320, May.
    4. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    5. Kathryn M.E. Dominguez & Linda L. Tesar, 2001. "Exchange Rate Exposure," NBER Working Papers 8453, National Bureau of Economic Research, Inc.
    6. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
    7. Gupta, Poonam & Mishra, Deepak & Sahay, Ratna, 2007. "Behavior of output during currency crises," Journal of International Economics, Elsevier, vol. 72(2), pages 428-450, July.
    8. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
    9. Gordon M. Bodnar & M.H. Franco Wong, 2000. "Estimating Exchange Rate Exposures: Some "Weighty" Issues," NBER Working Papers 7497, National Bureau of Economic Research, Inc.
    10. Hong, Kiseok & Tornell, Aaron, 2005. "Recovery from a currency crisis: some stylized facts," Journal of Development Economics, Elsevier, vol. 76(1), pages 71-96, February.
    11. Jorion, Philippe, 1990. "The Exchange-Rate Exposure of U.S. Multinationals," The Journal of Business, University of Chicago Press, vol. 63(3), pages 331-45, July.
    12. Parsley, David C. & Popper, Helen A., 2006. "Exchange rate pegs and foreign exchange exposure in East and South East Asia," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 992-1009, October.
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