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This paper examines the impact of exchange rate changes on the stock returns of 232 nonfinancial firms listed on the Pakistan Stock Exchange, for the period January 2000 to June 2014. To mitigate the problem of heteroskedasticity, we use a generalized least squares estimator. The estimated regression models indicate that exchange rate variations have a significant effect on firm value and that firms are exposed significantly to one-period lagged variation in the exchange rate. Our results suggest that, in addition to exchange rate dynamics, increased exchange rate volatility appears to have significant and negative effects on firms’ stock returns. Compared to domestic firms, multinational firms experience greater exchange rate exposure. Finally, we show that exchange rate depreciation and appreciation have significant differential effects on firms’ stock returns. These effects vary significantly across domestic and multinational firms.

Exchange Rate Exposure and Firm Value: An Assessment of Domestic Versus Multinational Firms