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Literature Review
Introduction
Since the breakdown of Brettoon Woods system in the 1970s, movements of exchange rate has a bearing on investors, analyst, managers and shareholders. With the development of economics, Bradley and Moles (2002) said that companies were unaffected by currency movements. However, till now, many empirical investigation that the movements of exchange rate may not only affect firms’ value but also can influence expose to exchange rate risk from different competitiveness level of firms, or the foreign currencies impact the value of stocks. During these researches some studies find a significant effect of exchange rate changes while others do not. There are lots of studies focused on the USA, although some studies focused on other countries. Furthermore, most of previous studies examined the exchange rate exposure by the non-financial companies.
Literature Review
Firms-level exchange rate exposure samples often involved a certain minimum proportion of exports sales. However, multinational firms’ transaction is likely to be more exposed. Jorion指导留学作业提供指导Essay，指导Assignment，请联系QQ：949925041 (1990) examined the relationship between exchange rate fluctuations and stock returns made use of a sample of 287 multinationals of US firms from the period 1971 to 1987. To the end, he found there were 5% of his sample firms exhibited significant exposure. So the study obtained that there was a relationship between firm’s stock returns and exchange rate fluctuations over that period. To extend, Jorion also discovered that the proportion of foreign sales to total sales of a firm is positively related to the extent of exchange rate risk. Continued with research development, Jorion (1991) investigated whether exchange rate is a risk factor in the equity market that focused on the monthly stock returns in New York Stock Exchange (NYSE) of US multinational corporations from 1971 to 1987 and confirmed that even if there is no significant relationship between changes in exchange rates and stock market return, the heavy industries as exporters(Chemical, Machinery, Mining and Automotive, etc) are benefited from the increasing the value of the dollar ,while light industries as importers(Textiles, Apparel, Department stores, etc) are suffer from the increasing the value of dollar. After Jorion’s(1990,1991) empirical, Amihud’s (1994) study exploited 32 US largest exporting firms’ combined with stock returns movements in the trade-weight exchange rate of the US dollar during the period 1979-1988. He separated two parts---the monthly and quarterly intervals. To the end, it reported that there is no significant coefficient about the relationship between the exchange rate and equity returns by monthly for these 32 companies. What is more, it approved that there is a weak significant relationship between the exchange rate movement and the stock return. What is more, as the same period, Walsh (1994) suggested that the stock returns would exhibit a lagged relationship to exchange rate changes in a competitive foreign exchange exposure.#p#分页标题#e#
Choi and Prasad (1995) observed around 409 US multinational firms’ sensitive exchange rate during a period starting on January 1978 and ending December 1989. They documented that there were 61 of 409 U.S. firms with significant exchange rate exposure. Over the entire estimation period, only 2 out of 10 industries (other retailing and mining) were significantly exposed to currency fluctuations. In addition, they also investigated a positive mean significance coefficient was 0.16 that indicated there was a negative relationship between the US dollar changes and the firm vale. It was different from Jorion (1990).
Several surveys found evidences to prove the time value, firm size and foreign sales as impact factors to influence the companies or industries face the exchange rate risks. For sets of firm size studies, Nance et al. (1993) addressed the relevance of hedging to firm level. The finding analyzed the purpose and incentives for using derivatives. Furthermore, the investigation showed that exchange rate exposure is less for larger firms than for smaller firms. Bartov and Bodnar (1994) indicated the contemporaneous and lagged exchange rate effects of the firms’ past annual financial statements and exposures have a same meaning. Chow et al. (1997a) considered the exchange rate risk related the stock return with a sample of 213 US multinational firms which with the diversified equity portfolios during the period 1977 to 1991. It was empirical the movements of exchange rate are important in short-term fluctuation stock returns. He found that all assets are exposed to the exchange rate risks and there was a significant combination with exchange rate exposure. In addition, they found the the exchange rate risks on stock returns by using transaction exposure, economic exposure and interest rates changes cooperate with exchange rate movements.In the same year, Chow et al. (1997b) measured the extra-market of 213 US firms about the correlations between the exchange rate exposure and the stock return by using monthly data from the year 1977 to1989. They found only few of significant relationship between the stock returns and movements in exchange rate at same period. The significant exchange rate exposure increasing concerned with the length of the stock return level in either a large or small firms. However both negative and positive of the movements exposed to exchange rate across all horizons. As a result, they suggested that from these two examinations, it would have a significant relationship between firm size and exposure. (See, He and Ng 1998, Nydahl 1999, De Jong et al. 2006)
Dekle (2005) demonstrated about the exchange rate exposure effects on the foreign competitive structure of markets and firm level. He found there was a relationship between the exposure and foreign producers. With the increasing foreign producers, the exchange rate exposure is increased as well. However, the sessions also examined the substitutability type of competition among exports. At last he found that the colluding exporters were more higher exposed than competing exporters when increased the substitutability. #p#分页标题#e#
In addition, the in directive of firms, the exchange rate exposure may be more exposed than with direct expose. One of the studies is Dominguez and Tesar (2006). They test eight non-US industrialized and developed countries to observe the exposure during the period 1980 to 1999. As a result, the study found there were five out of eight firms had a significant economic exposure. To extend, they reported that there were no any relations between trade and exposure. However, they thought the foreign sales concerned with exposure in Germany, Japan and UK firms and the higher sales would harmonize with higher exposure. This assertion gets some support from Miller and Rener (1998). This study examined the different strategy and industry structure related to the exposure to foreign exchange rate movement by using a sample of US’s firms during the period 1988 to 1992. They found about 13%-17% of U.S. non-financial firms exposed for foreign exchange rate movements. So the study pointed out that within industries might have significant exposures. But the direction of the foreign investment would reduce the exposure to the foreign exchange rate movements even within an industry.
Furthermore, some studies have concerned with the foreign sales to discuss the exchange rate exposures. Shin and Soenen (1999) verified the stock return is combined with the exchange in the value of the US dollar. They found that almost of small multinational firms are exposed to foreign exchange risk and get profitable from a weakening in the international value of the US dollar.
Williamson (2001) used a small sample of industries from the US and Japan to examine the relationship between the firm value and exchange rate movements during 1973 to 1995. At the end of the investigation, he found that after the Japanese sold in the US market, the exposure became to exist in the exchange rate of yen and dollar. Doidge et al. (2002) reported that foreign activities concerned with exchange rate exposure and large firms are more sensitive to currency changes than small firms. In addition, during the period of large currency depreciation, the international firms would get more benefits national firms. Jayasinghe and Tsui (2007) study examined the exposure coefficients of exchange rate in 14 Japanese industries by employing a bivariate GJR-GARCH model that integrated with firms’ stock return. It investigated that returns on electrical & electronic equipment, textiles and household productions, automobile and parts, information technology and hardware are positively to the yen changes while some of the industries such as construction and building materials and oil &gas industries react negatively to the changes in yen.
Kroon and Veen (2004) investigated sensitive currency related to the “general” stock market based on a sample of 1,691 stocks from 24 countries during the period 1996 - 2002. The study showed there is the largest effect for euro-based investors. The finding of this investigation reported that only 16% individual companies had one or more statistically significant “Stock-specific” currency exposures. Most companies had insensitively currency and their stock returns for the general market factors. #p#分页标题#e#
Doukas et al. (2003) affirmed the affect from exchange rate exposure to multinational and high exporting firms, this finding showed that the low exporting and domestic firms afford significant exposure. Entorf, H, Moebert, J. and Sonderhof, K. (2007) chose a sample of 27 countries found that the positive exchange rate exposure depends on the share of national exports and negativity on the imports that relate with GDP.
Focus on the industry level and foreign activities found some evidenced to support there is no significant or weak relationships. Bodnar and Gentre (1993) measured the level of the exchange rate exposure based on the three countries: Canada, Japan and the USA during the period from 1979 to 1988. At the end of the examination, 指导留学作业提供指导Essay，指导Assignment，请联系QQ：949925041they got the data that: 11 of 39 U.S. industries, 4 of 19 Canadian industries, and 7 of Japanese industries with a significant exposure. These three countries’ totally around 20%- 35% industries faced the significant exposure of the exchange rate. However, Bartov and Bondnar(1994) based on a data of 208 US corporate firms to prove that there is a significant relationship between the abnormal returns of foreign activities and changes in the value of the US dollar from the starting 1978 to the ending 1989. From these 208 firms, more than 5 percent of pre-tax income in absolute terms reported on their annual financial statements that at least 75 per cent of the time was negatively correlated with the corresponding changes in a US dollar trade-weighted index. They found exchange rate movements had a low influence on abnormal returns. To the end of the study, they investigated that there is no significant relationship between the abnormal returns of foreign activities and changes in the value of the US dollar.
Some empirical studies had investigated the significant relationship between stock market return and exchange rate exposure. Booth and Rotenberg (1990) investigated the stock returns and the exchange rate movements (against the US dollar by Canadian) based on a sample of 156 Canadian firms during the period 1979 to 1983. Focus on the monthly data, they found nearly 50% firms had significant correlation between stock return and movements of exchange rate in the value of the dollar against by the Canadian and the US. In addition, the results showed that overall of the significant coefficients are negative. Some other data sources based on 20 Japanese firms, Chow and Chen (1998) stated the implication of the exchange rate changes and the value of firms. From the study, they obverse the currency depreciation would affect the import ratios and would result higher import ratios. If these firms were industries, there is a less detrimentally affected of higher exporters. Till firms’ value in the long-term that might be influenced by the exchange rate movements. #p#分页标题#e#
To certify how the exchange rate changes effect on firm’s stock returns in different industry. Some studies focused on the industry level.
Fang and Loo (1994) examined the relations about 20 U.S. industries common stock returns and its trade-weighted exchange rate during the period 1981 to 1990. At the beginning, they found that heavy industries, such as the mining, food and beverage, chemical, petroleum, and utilities obtained positive which based on the U.S. dollar decreased and the vice versa. However, light industries such as textile and apparel, department stores, other retail trade, banking and finance and real estate got negative from the depreciation of the US dollars and vice versa. To sum up, exchange rate exposure could affect on the light industries positive, which the heavy industries exactly opposite.
In recent year, Chen et al. (2002) investigated the relationship between the foreign exchange rate risk and the US industries value. They found during the period 1990 to 1994, the proprietary firms had the negative exchange rate. However, from 1995 to 1999, it became to positive changes. The result suggested that there is an appreciating US dollar affects the firms’ stock return. Kiymaz (2003) investigated multinationals foreign exchange rate exposure on the Istanbul Stock Return (ISR) from 109 Turkish firms during the period 1991 to 1998. He found there were around 62 of the 109 firms had a significant correlation between exchange rate fluctuations and the value of the companies by using the residual market index. The study also reported that most Turkish industries had a highly negative exposure to the foreign exchange risks and the stock return which included textile, machinery, chemical and financial industries and they explained that the consequences of exchange rate exposures are significant different in different industrial sectors.
To the end of the literature review, there are some empirical of the UK non-financial firms’ and the exchange rate exposure samples. Donnelly and Sheehy (1996) in their research paper argued the abnormal stock returns effect of the trade-weighted exchange rate movements. It based on a sample of 39 UK largest exporting firms with foreign sales at least 40% during the period 1978 to 1992. The study found there are negative effects between the foreign exchange rate and the stock returns of UK largest exporter. Joseph (2002) study by using two different variables which are exchange rate and interest rate to determine the effect of exchange rate movements and interest rate movements the UK industries (Chemical, electrical, engineering and pharmaceutical) during the period 1998 to 2000. He found the foreign exchange rate changes and the movements of interest rate would affect industries stock return. Because of more detailed verification, Rees and Unni (2005) investigated that UK, France and Germany, the large firms with exchange rate exposure during pre-euro period. However, the sensitive of exchange rate is considered stronger than antecedent.#p#分页标题#e#
El-Masry (2006a) declared the foreign exchange rate change has a significant effect on UK industries stock returns. He confirmed 364 UK non-financial firms in 20 different industries from January 1981 to December 2001.In the processing of the research, El-Masry measured important economic variable reflect by both trade-weighted nominal exchange rates and real exchange rates would affect on the industries’ stock returns. More empirical studies showed up to 65 per cent (13 of 20) of industries have positive exchange rate exposure coefficients. That means most of industries would benefit from the appreciation of the UK sterling. In a word, he affirmed that both of the contemporaneous and lagged exchange rate fluctuations are significant to exposure. El-Masry et al. (2007) used different exchange rate measures which focus on an equally weighted exchange rate to examine the relationship between exchange rate exposure and UK non-financial firms’ value. He found a sample of 364 UK non-financial companies during the period 1981-2001. Based on the measurements in nominal and real terms, the study explores the movement of foreign exchange rates. El-Masry found the trade-weighted real exchange rates changes had more significant influences on firm’s equity returns. In addition, the result also showed that the significant exchange rate exposure existed high proportion positive coefficients among firms, exhibiting the higher proportion of UK firms could benefit from the appreciation of sterling.
However, Makar and Huffman (2008) investigation consisted of 44 UK multinational firms during the period 1999 to 2002. They examined the relation between firms’ stock return and exchange rate movements by using latterly UK annual report exposures to take a firm-specific approach. The study found there was significant foreign exchange rate exposure in more firms. This result used of financial currency-hedge techniques to reduce the currency risk associated with change in the bilateral exchange rate to which they are most exposed. What is more, they also verified that with the increasing of return horizon, the significant exposure to principal currencies increases.
Conclusion
In summary for this literature review section, most of these investigations’ emphases focus on exchange rate exposure relate to the firms’ value or level. (Jorion (1990), Choi and Prasad (1995), Nance et al. (1993), Dekle (2005) ) While, the industries’ stock market return and exchange rate exposure relationship have the obvious argument. Some empirical studies support the view that there is a significant correlation between exchange rate exposure and stock market returns such as Chow et al. (1997a) Chow et al. (1997b). Meanwhile, the intensive research of industries level, people investigated the relationship between the exchange rate exposure and industries’ stock return in different countries whether the relations are significant or not. Such as, Bodnar and Gentre (1993), Fang and Loo (1994), Miller and Rener (1998), Joseph (2002), Dominguez and Tesar (2006), El-Masry (2006a), El-Masry et al. (2007), Jayasinghe and Tsui (2007), Makar and Huffman (2008).#p#分页标题#e#
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