Exchange Rate Exposure and Competition: Evidence from the World Automotive Industry
Georgetown University WP FINC-1377-43-198
57 Pages Posted: 14 Apr 1998
Date Written: February 1998
Financial theory predicts that a change in the real exchange rate should affect the value of a multinational firm. To a large extent, past empirical research has not supported this theory. This study discusses and evaluates the effect of real exchange rate changes on a multinational firm and a global competitor and incorporates the effect of industry competition on the relation between exchange rates and firm value. In order to better test the hypothesis and address the shortcomings of previous studies, tests are conducted using a sample of automotive firms from the U.S., Japan and Germany. The analysis is done at the country specific portfolio level as well as the firm specific level. Consistent with the hypothesis, I find significant rate exposure to exchange rate shocks. Moreover, there is evidence of time variation in exchange rate exposure which is consistent with a change in the competitive environment within the industry. Finally, evidence is presented that is consistent with the hedging value of a firm producing in the export market, but only after production exceeds a certain level of sales in the export market.
JEL Classification: G39, G30, G15, F31, F23
Suggested Citation: Suggested Citation