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The exchange rate exposure of UK nonfinancial companies: industry level analysis

Ahmed A. El‐Masry (Plymouth Business School, Drake Circus, Plymouth, Devon, UK)

Managerial Finance

ISSN: 0307-4358

Article publication date: 1 February 2006

5825

Abstract

Purpose

Financial theory predicts that a change in an exchange rate should affect the value of a firm or an industry. To a large extent, past research has not supported this theory, which is surprising especially after considering the substantial exchange rate fluctuations over the three decades. This study seeks to extend previous research on the foreign exchange rate exposure of UK nonfinancial companies at the industry level over the period 1981‐2001.

Design/approach/methodology

In this study, exchange rate exposure is defined as the change in the value of the firm or industry due to the changes in exchange rates. This study differs from previous studies in that it considers the impact of the changes (actual and unexpected) in exchange rates on firms’ or industries’ stock returns. The approach employs OLS model to estimate foreign exchange rate exposure of 364 UK nonfinancial companies over the period 1981‐2001. All data are collected from the Datastream database.

Findings

The findings indicate that a higher percentage of UK industries are exposed to contemporaneous exchange rate changes than those reported in previous studies. There is also evidence of significant lagged exchange rate exposure. This lagged exchange rate exposure is consistent with findings in previous studies that may exist some market inefficiencies in incorporating exchange rate changes into the returns of firms and industries.

Research limitations/implications

Future research in the area should consider additional factors that might affect a firm's and an industry's exposure to exchange rate changes.

Practical implications

The findings of the study have interesting implications for public policy makers who wish to understand links between policies that affect exchange rates and relative wealth affects. These findings should also be of particular importance to investors who under or overweight large multinational corporations.

Originality/value

The study extends previous research on foreign exchange rate exposure of UK companies.

Keywords

Citation

El‐Masry, A.A. (2006), "The exchange rate exposure of UK nonfinancial companies: industry level analysis", Managerial Finance, Vol. 32 No. 2, pp. 115-136. https://doi.org/10.1108/0307435061064190

Publisher

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Emerald Group Publishing Limited

Copyright © 2006, Emerald Group Publishing Limited

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