Fx Exposure

Journal of International Economics 68 (2006) 188 – 218 www.elsevier.com/locate/econbase

Exchange rate exposure

Kathryn M.E. Dominguez a,b,c,*, Linda L. Tesar b,c,1

Ford School of Public Policy, University of Michigan, United States b NBER, United States c Department of Economics, University of Michigan, Lorch Hall, 611 Tappan Street, Ann Arbor, MI 48109-1220, United States Received 23 November 2001; received in revised form 1 October 2004; accepted 21 January 2005

a

Abstract In this paper we examine the relationship between exchange rate movements and firm value. We estimate the exchange rate exposure of publicly listed firms in a sample of eight (non-US) industrialized and emerging markets. We find that exchange rate movements do matter for a significant fraction of firms, though which firms are affected and the direction of exposure depends on the specific exchange rate and varies over time, suggesting that firms dynamically adjust their behavior in response to exchange rate risk. Exposure is correlated with firm size, multinational status, foreign sales, international assets, and competitiveness and trade at the industry level. D 2005 Elsevier B.V. All rights reserved.

Keywords: Firm- and industry-level exposure; Exchange rate risk; Pass-through JEL classification: F23; F31; G15

1. Introduction It is widely believed that changes in exchange rates have important implications for financial decision-making and for the profitability of firms. One of the central

* Corresponding author. Gerald R. Ford School of Public Policy, University of Michigan, Lorch Hall, 611 Tappan Street, Ann Arbor, MI 48109-1220, United States. Tel.: +1 734 764 9498; fax: +1 734 763 9181. E-mail addresses: kathrynd@umich.edu (K.M.E. Dominguez), ltesar@umich.edu (L.L. Tesar). 1 Tel.: +1 734 763 2254; fax: +1 734 764 2769. 0022-1996/$ - see front matter D 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.jinteco.2005.01.002

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