Using survey data to resolve the exchange risk exposure puzzle: Evidence from U.S. multinational firms |
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Authors: | R Jongen A Muller WFC Verschoor |
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Institution: | 1. Erasmus School of Economics, Erasmus University Rotterdam, The Netherlands;2. De Nederlandsche Bank, The Netherlands;3. HEC Management School, University of Liège, Belgium;4. Limburg Institute of Financial Economics, Maastricht University, The Netherlands |
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Abstract: | This paper examines the effect of unexpected exchange rate movements on U.S. shareholder wealth. Empirical results based on a sample of 634 U.S. multinational firms (1) confirm previously reported evidence that the disaggregation of the worldwide trade-weighted U.S. dollar exchange rate index into seven region-specific trade-weighted indices increases the precision and significance of exposure estimates; (2) show that models assuming that changes in spot exchange rates are unanticipated are frequently misspecified and, thus, unable to correctly detect the impact of currency movements on firm value; (3) reveal that forward and survey expectations enable us to distinguish between the effect of ‘realized’ and ‘unexpected’ currency movements; and (4) reveal that investors making pricing and hedging decisions prefer to use the information contained in short-term forward and survey expectation rates to the information included in long-term forecasts. |
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Keywords: | F3 G12 |
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