The Real Effects of Exchange Rate Risk on Corporate Investment: International Evidence

Mark Taylor, Zigan Wang and Qi Xu

No 15053, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We empirically investigate the real effects of exchange rate risk on investment activities of international firms. We provide cross-country, firm-level evidence that greater unexpected currency 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 mechanisms: Real options and precautionary savings. Our findings are consistent with both explanations. Two 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: 2020-07
New Economics Papers: this item is included in nep-cfn, nep-fdg, nep-opm and nep-rmg
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Journal Article: The real effects of exchange rate risk on corporate investment: International evidence (2021)
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