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Diversification and firm risk: New evidence on exchange rate exposure

Taek Ho Kwon, Sung C. Bae and Chenyang Liu

Journal of International Financial Markets, Institutions and Money, 2025, vol. 101, issue C

Abstract: This study examines the effect of industrial diversification on exchange rate exposure based on the resource-based and portfolio views of corporate diversification. Sampling Korean firms, we report new evidence that once the effect of geographic diversification is controlled and the self-selection bias is corrected, industrial diversification provides a strong positive effect in reducing exchange rate exposure. The mitigating effect of industrial diversification on FX exposure is more pronounced for geographically diversified firms which are in nature highly exposed to FX risk. Our results indicate that industrial diversification helps firms with international operations reduce their exchange rate exposure, supporting the complementary role of industrial diversification in managing FX risk associated with geographic diversification. Our study offers further discussions on potential mechanisms through which industrial and geographic diversification interacts in FX risk reduction.

Keywords: Industrial diversification; Geographic diversification; Exchange rate exposure; Korean firms (search for similar items in EconPapers)
JEL-codes: F31 G32 G34 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:101:y:2025:i:c:s1042443125000484

DOI: 10.1016/j.intfin.2025.102158

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Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

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