does exchange rate affect firm

8/3/2019 Does Exchange Rate Affect Firm

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Does Exchange Rate Affect Firms Value

Literature Review

There are many assumption affect firm value. One of the theory or assumption is

exchange rate. Exchange rate can be defined as the current market price for which one

currency can be exchanged for another.

According to Choi (1986), exchange rate affect firm value can be determine through

foreign economic effect, home economic effect, and the accounting effect of foreign cash flow.

The effect on home economics is positive, elastic foreign demand for United States export. On

the other hand, there is negative effect on foreign economic under certain condition, but

depends on linkage exchange rates and prices, output and input demand elastic, and market

structure. The accounting effect on foreign cash flow same with home economic which is

positive assume some market unproductive and foreign expose position. Strong discount margin

or weak United States dollar will raise and made the firm value increases. The greater is the

effect of accounting foreign economic effects. The greater is the home economic effect relative

to foreign economic effect.

Besides that, exchange rates affect firm value on economic exposure and translation

exposure (Dahlquist & Robertsson, 2001). Economic exposure means effect on firm cash flow.

It classify into operating exposure and transaction exposure. Whereas transaction exposure

defines as future date been use to settle a firm when entered a contract involve in foreign

currency. Others than that, operating exposure connected on firm existing financial contracts.

Lastly, translation exposure or known as accounting exposure by changing the financial

statements of a foreign subsidiary into reporting currency of the parent company to prepare a

solid financial statements. Cash flow of a firm will have a negative effect from the exchange

rate depreciation.

Furthermore, a shock exchange rate will affect profitable firm by making it lessmarket power (Nucci & Pozzolo, 1998). it will made investment decision more sensitive

to currency value fluctuation than those firm with a greater skill to adjust their cost-price

margins. Moreover, investment responsiveness affect from shock of the exchange rate.

A negative effect on the cost channel whereas positive effect on investment came from

the depreciation of the exchange rate.


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Others than that, exchange rate has a affect multinational company with large

percentage (Aybar &Thirunavukkarasu, 2005). There is positive impact for MNC is net

exporter. Cash flow generated from foreign country operation. The depreciation of local

currency makes them competitive in foreign market. On the other hand, net importer will lose

from a depreciation of local currency as they reach high price for their imported good in local

currency.

The important of exchange fluctuation on firm value (Doukas,et all,1999). There is an

important relation between change in home currency and performance of the firm. The

evidence shows the particular firm is sensitive to exchange rate changes.

The foreign sales as the determinant of exchange rate affect on multinational firm

(Doidge, et all, 2002). There been differences between countries about the foreign sale as thedeterminant. It depends on the country because there is a country that has found no relation

on foreign sale.

An exchange rate can affect firm profit, survival and sales, and firm services. (Baggs,

etc, 2008). A negative effect on survival of the manufacturing is came from depreciation of

local currency. The impact for the profit is through cost and relative price and controlling of the

output. The absence of tariff and trade linearization has affected the firm services.

Factor that influence an exchange rate affect firm level ( Solakoglu, 2005). Four factors

include firm maturity, firm size, measure of risk adaptation, and international transaction. A firm

maturity is the old of the firm and shows the old firm manages efficiently than a new firm.

Large firm has lower exchange rate affect.

The important measuring an exchange rate risk to reduce the affect on profit and the

firm value (Papaioannou, 2006). This can be done by analyzing advantages and

disadvantages on hedging for firm and evaluate best practice on exchange risk

management.

The exchange rate affect firm value through import goods price ( Barber,etc, 1999).

Import price reflect the elasticity of the local currency price on foreign good with respect to

change in the rate between the local currency and exporter currency.


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UNIVERSITI MALAYSIA SABAH

INTERNATIONAL FINANCE INDIVIDUAL

ASSIGNMENT: DOES EXCHANGE RATE AFFECT FIRM

VALUE

NAME: HARDIANTO BIN MASRI

MATRIC NUMBER: BB09110023

LECTURER NAME: JARATIN LILY

COURSE CODE: BA31203


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does exchange rate affect firm

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