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Foreign Exchange Exposure Elasticity and Financial Distress
Author(s) -
Wei Kelsey D.,
Starks Laura T.
Publication year - 2013
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12016
Subject(s) - monetary economics , financial distress , currency , exchange rate , cash flow , economics , distress , volatility (finance) , business , econometrics , finance , financial system , ecology , biology
Financially distressed firms have limited ability to manage exchange rate exposure over time which could cause their fundamental value to be sensitive to the cash flow volatility related to currency movements. Accordingly, we hypothesize that the likelihood and costs of financial distress help explain cross‐sectional variations in return sensitivity to currency movements. We find that the level of exchange rate exposure elasticity is related to proxies for the likelihood of financial distress, growth opportunities, and product uniqueness. Further, firms with a greater likelihood and higher costs of financial distress exhibit greater abnormal returns in response to large exchange rate shocks.