The Real Effects of Exchange Rate Risk on Corporate Investment: International Evidence

69 Pages Posted: 28 Jul 2020 Last revised: 14 Jul 2021

See all articles by Mark P. Taylor

Mark P. Taylor

Washington University in St. Louis - John M. Olin Business School; Centre for Economic Policy Research (CEPR); Brookings Institution

Zigan Wang

The University of Hong Kong - School of Economics and Finance; Columbia University

Qi Xu

Zhejiang University - School of Economics and Academy of Financial Research

Date Written: July 2020

Abstract

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

Taylor, Mark P. and Wang, Zigan and Xu, Qi, The Real Effects of Exchange Rate Risk on Corporate Investment: International Evidence (July 2020). CEPR Discussion Paper No. DP15053, Available at SSRN: https://ssrn.com/abstract=3661396

Mark P. Taylor (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Zigan Wang

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Qi Xu

Zhejiang University - School of Economics and Academy of Financial Research

Yuquan Campus 38 Zheda Road
Hangzhou, Zhejiang 310027
China

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