Firm-level exchange rate exposure and equity returns: Indian perspective
- Indian Institute of Foreign Trade
- 26(2), Apr-Jun, 2024: p.31-47
This article investigates the relationship between firm-level exchange rate exposure and equity returns in the Indian context. With increasing globalization, Indian firms are more vulnerable to currency fluctuations, particularly those engaged in international trade and cross-border financing. The study analyzes how exchange rate volatility affects firm performance and shareholder value, highlighting sectoral differences between exporters, importers, and domestically oriented firms. Empirical evidence suggests that firms with higher foreign currency exposure exhibit significant sensitivity in equity returns, underscoring the importance of hedging strategies and financial risk management. The paper situates these findings within broader debates on emerging market vulnerabilities, corporate governance, and investor behavior. By focusing on India, the study contributes to understanding how exchange rate dynamics shape firm-level outcomes in developing economies, offering insights for policymakers, investors, and corporate managers. Exchange rate movements can have far-reaching implications for a firm’s equity return. The research question of identifying firm-specific determinants that make firms more responsive to exchange rate movements has rarely been examined in extant literature. This paper employs a two-stage regression specification on pooled data (Akay and Cifter, 2014) on 187 Indian non-financial firms and presents a comprehensive analysis of exchange rate exposure and its firmspecific determinants assimilating firm-level exposure, viz. transaction, translation, economic, and real operating exposure. Results exhibited that rupee depreciation will make firms highly sensitive to exchange rate movements, resulting in a fall in their equity returns. Furthermore, firm-level results exhibit that the influence of firm-specific factors on exchange rate exposure is more pronounced. Moreover, the author found evidence of a significant fall in exposure for firms having high foreign receipts vis-à-vis firms having high foreign payment bills. The balance sheet exposure arising on account of accounting reconciliation in non-current and current liabilities and assets reveals a positive and momentous effect on foreign exchange exposure. Similarly, firms with higher market value are exposed more. The influence of macroeconomic indicators has a considerable impact on firm-specific exchange rate exposure. Results offer insights for policymakers, businesses, and the general public. – Reproduced