The real effects of exchange rate risk on corporate investment: International evidence

Mark Taylor, Zigan Wang and Qi Xu

Journal of International Money and Finance, 2021, vol. 117, issue C

Abstract: Through an analysis of over 4,000 multinational firms with foreign exchange (FX) exposures in 44 countries over a 30-year period to 2017, we provide cross-country evidence that greater firm-level unexpected FX volatility leads to significantly lower capital expenditures. The effect is stronger for countries with higher economic openness and for firms that do not use currency derivatives to hedge. We empirically test the implications of two potential driving mechanisms: real options and precautionary savings. Our findings are consistent with both explanations. Two groups of historical events in the FX markets strengthen the identification of our results.

Keywords: Exchange rate; Uncertainty; Corporate investment (search for similar items in EconPapers)
JEL-codes: F31 G31 G32 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (9)

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Working Paper: The Real Effects of Exchange Rate Risk on Corporate Investment: International Evidence (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:117:y:2021:i:c:s0261560621000838

DOI: 10.1016/j.jimonfin.2021.102432

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