Improving Tools for Assessing Financial Capacity in the Electric Power Industry

Inna Rykova () and Denis Taburov ()
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Inna Rykova: “Financial Research Institute” (Russia)
Denis Taburov: “Financial Research Institute” (Russia)

Journal of Corporate Finance Research, 2019, vol. 13, issue 1, 93-106

Abstract: This study is dedicated to estimating the impact of currency risk on the cost of equity in Brazil, Russia, India and South Africa. Our contribution to the literature is that we have obtained evidence on the pricing of exchange rate risk in de-veloping countries, which at the time of writing is quite scarce. This scarcity is one motivation for our research, which is dedicated to BRICS capital markets, though with the Chinese stock market excluded since it is heavily regulated. The aim of this research is to determine whether in emerging countries stock markets currency risk is a significant factor that influences the cost of equity capital in a company. Changes in the value of exchange rates can impact the cash flows of a firm and its exposure to risk, and hence, the value of the company. In our research we will discuss the influence of exchange rate movements on the value of firms through their impact on the cost of equity. Specifically, we investigate whether companies that report substantial currency gains or losses have to pay a higher required rate of return on equity. Furthermore, in this study we make an attempt to estimate currency risk premia for exposure to appreciation and depreciation of currency separately, and try to identify possible differences.For each country, three analytical models that extend the Fama-French Three Factor Model (by incorporating curren-cy risk) are estimated. We use an equal-weighted portfolio approach to identify currency risk factors. These factors are estimated either by using information about the ratio of currency gains to sales, or the magnitude of covariation between equity returns and exchange rate changes. In the second case appreciation and depreciation of domestic currency against the US dollar is considered separately.The results indicate that in Russia, firms which report substantial currency losses pay a positive risk premium, while in Brazil, India and South Africa companies with significantly positive or negative currency gains pay a lower required return on equity than firms with almost zero currency gains. Finally, we attempt to explain the estimation results using a sectoral breakdown of product exports for each country of the data sample.

Keywords: exchange rate exposure; cost of equity; currency markets; stock returns; emerging markets (search for similar items in EconPapers)
JEL-codes: G12 G32 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:hig:jcorpf:v:13:y:2019:i:1:p:93-1087

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