The report examine whether exchange rate movements affect firms’ values and the impact of hedging on exchange rate exposure and the market value of firms. In the first essay, I empirically examine the firm-specific exchange rate exposure of Japanese multinational corporations (MNC). Exchange rate exposure is defined as the effect of exchange rate changes on the value of a firm. Although financial theory suggests that exchange rate movements should affect the value of a multinational corporation, most previous studies have failed to document significant exchange rate exposure. One major reason for the failure may be the specification of the regression model–in particular, the inappropriate selection of the exchange rate index. I study the problem by using detailed exchange rate data and propose a method to construct a firm-specific exchange rate index for each Japanese MNC based on the number and location of their subsidiaries. In addition, to account for the possibility that exchange-rate crises may have a different impact on a firm from the periods of normal exchange rate fluctuations, I incorporate a crisis indicator in the standard exchange rate exposure regression model proposed by Jorion (1990). Results suggest that using the firm specific exchange rate and allowing for a crisis indicator significantly increases the evidence of exchange rate exposure of the firms in the sample. In the second essay, I examine the role of hedging in the exchange rate risk management of Japanese multinational corporations. Using a sample of large Japanese multinationals, I examine the impact of hedging on exchange rate exposure. By using foreign currency derivatives as a proxy for financial hedging…
Contents
CHAPTER I. INTRODUCTION
1.1 What is Foreign Exchange Rate Exposure
1.2 Corporate Hedging
1.3 Empirical Questions of This Study
CHAPTER II. FIRM-SPECIFIC EXCHANGE RATE EXPOSURE OF JAPANESE MULTINATIONAL CORPORATIONS
2.1 Introduction
2.2 Literature Review
2.3 Data Description and Summary Statistics
2.4 Model
2.4.1 Jorion’s Model
2.4.2 Ihrig’s Model
2.4.3 Adjustments to Ihrig’s Model
2.4.4 Adding a Crisis Indicator
2.5 The Exchange Rate Exposure of Japanese Firms
2.5.1 The Results for Jorion’s Model
2.5.2 The Results for Ihrig’s Model
2.5.3 The Results of Adjustment to Ihrig’s Model
2.5.4 Results of Adding a Crisis Indicator
2.5.5 Robustness Analyses
2.6 Conclusions
CHAPTER III. HEDGING IN THE RISK MANAGEMENT OF EXCHANGE RATE EXPOSURE OF JAPANESE MULTINATIONAL CORPORATIONS
3.1 Introduction
3.2 Literature Review
3.2.1 Empirical Evidences of Hedging and Exchange Rate Exposure
3.2.2 Empirical Evidences of the Determinants of Corporate Hedging
3.3 Sample Description
3.4 Hedging and Exchange Rate Exposure
3.4.1 Methodology Framework
3.4.1.1 Stage One: Estimation of Exchange Rate Exposure
3.4.1.2 Stage Two: Cross-Sectional Estimation
3.4.2 Regression Results
3.4.3 Robustness Check
3.5 The Determinants of Foreign Currency Hedging
3.5.1 Factors Affecting a Firm’s Foreign Currency Hedging
3.5.1.1 Corporate Tax Structure
3.5.1.2 Transactions Costs of Financial Distress
3.5.1.3 Underinvestment Costs
3.5.1.4 Foreign Currency Exposure
3.5.1.5 Hedging Substitutes
3.5.2 Tests and Results
3.5.2.1 Univariate Tests
3.5.2.2 Multivariate Tests
3.6 Conclusions
CHAPTER IV. FOREIGN CURRENCY HEDGING AND FIRM MARKET VALUE 4.1 Introduction
4.2 Prior Hedging Theories and Empirical Evidences
4.3 Sample Description and Variable Definitions
4.3.1 Sample Description
4.3.2 Firm Value and Explanatory Variables
4.4 Empirical Results
4.4.1 Relation between the Use of Derivatives and Firm Value
4.4.1.1 Univariate Tests
4.4.1.2 Multivariate Tests
4.4.1.3 Robustness Tests
4.4.2 Relation between the Amount of Derivative Use of Firm Value
4.5 Conclusions
References
Appendix 2.1 Crisis Dates in Edison’s (2001) study
Author: Chen, Qing
Source: City University of Hong Kong
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