A Firm-Specific Analysis of the Exchange-Rate Exposure of Dutch Firms
Abe De Jong
Erasmus University - Rotterdam School of Management
Jeroen E. Ligterink
University of Amsterdam - Department of Finance and Organization
Nyenrode University - Center for Finance
September 2002, 12
ERIM Report Series Reference No. ERS-2002-109-F&A
We examine the relationship between exchange-rate changes and stock returns for a sample of Dutch firms over 1994-1998. We find that over 50% of the firms are significantly exposed to exchange-rate risk. Furthermore, all firms with significant exchange-rate exposure benefit from a depreciation of the Dutch guilder relative to a trade-weighted currency index. This result confirms that firms in open economies, such as the Netherlands, exhibit significant exchange-rate exposure. We collect unique information on the most relevant individual currencies for each firm with respect to their influence on firm value. Our results indicate that the use of a trade-weighted currency index and the use of individual exchange rates are complements. We also measure the determinants of exchange-rate exposure. As expected, we find that firm size and the foreign sales ratio are significantly and positively related to exchange-rate exposure. In contrast with our hypothesis, off-balance hedging using derivatives has no significant effects. Finally, in line with theory, we find that exposure is significantly reduced through on-balance sheet hedging, i.e. through foreign loans and by producing in factories abroad.
Number of Pages in PDF File: 33
Keywords: foreign exchange rates, exposure measurement, international finance, risk management, The Netherlands
JEL Classification: M, M41, G3, F31, G15working papers series
Date posted: January 18, 2003
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