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A Firm‐Specific Analysis of the Exchange‐Rate Exposure of Dutch Firms
Author(s) -
Jong Abe,
Ligterink Jeroen,
Macrae Victor
Publication year - 2006
Publication title -
journal of international financial management and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.818
H-Index - 37
eISSN - 1467-646X
pISSN - 0954-1314
DOI - 10.1111/j.1467-646x.2006.00119.x
Subject(s) - exchange rate , currency , depreciation (economics) , monetary economics , foreign exchange risk , economics , index (typography) , value (mathematics) , sample (material) , balance sheet , enterprise value , interest rate parity , stock (firearms) , business , financial economics , microeconomics , finance , statistics , profit (economics) , mechanical engineering , chemistry , mathematics , capital formation , chromatography , financial capital , world wide web , computer science , engineering
We examine the relationship between exchange‐rate changes and stock returns for a sample of Dutch firms over 1994–1998. We find that over 50 per cent of the firms are significantly exposed to exchange‐rate risk. Furthermore, all firms with significant exchange‐rate exposure benefit from a depreciation of the Dutch guilder relative to a trade‐weighted currency index. This result confirms that firms in open economies, such as the Netherlands, exhibit significant exchange‐rate exposure. We collect unique information on the most relevant individual currencies for each firm with respect to their influence on firm value. Our results indicate that the use of a trade‐weighted currency index and the use of individual exchange rates are complements. We also measure the determinants of exchange‐rate exposure. As expected, we find that firm size and the foreign sales ratio are significantly and positively related to exchange‐rate exposure. In contrast with our hypothesis, off‐balance hedging using derivatives has no significant effects. Finally, in line with theory, we find that exposure is significantly reduced through on‐balance sheet hedging, i.e., through foreign loans and by producing in factories abroad.