The Real Effects of Exchange Rate Risk on Corporate Investment: International Evidence
69 Pages Posted: 28 Jul 2020 Last revised: 14 Jul 2021
Date Written: July 2020
We empirically investigate the real effects of exchange rate risk on investment activities of international firms. We provide cross-country, firm-level evidence that greater unexpected currency volatility leads to significantly lower capital expenditures. The effect is stronger for countries with higher economic openness and for firms that do not use currency derivatives to hedge. We empirically test the implications of two potential mechanisms: Real options and precautionary savings. Our findings are consistent with both explanations. Two historical events in the FX markets strengthen the identification of our results.
JEL Classification: F31, G31, G32
Suggested Citation: Suggested Citation