Operating Income, Exchange Rate Changes, and the Value of the Firm: An Empirical Analysis

Walsh, Eamonn J.

doi:10.1177/0148558x9400900405

Cited by 28 publications

(15 citation statements)

References 9 publications

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“…Bartov and Bodnar (1995) relate the lagged exposure to the choice of accounting methodologies and document it diminishing over time. Several other studies (Donnelly and Sheehy, 1996;Walsh, 1994) find only weak significance for lagged exchange rates and, in contrast, most others considering this possibility find no significant lag variables and are thus are in line with the market efficiency hypothesis (e.g. Amihud, 1994).…”

Section: Exposure To Exchange Rate Risk and The Exposure Puzzlementioning

confidence: 83%

The exchange rate exposure puzzle

2007

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Based on basic financial models and reports in the business press, exchange rate movements are generally believed to affect the value of nonfinancial firms. In contrast, the empirical research on nonfinancial firms typically produces fewer significant exposures estimates than researchers expect, independent of the sample studied and the methodology used, giving rise to a situation known as "the exposure puzzle". This paper provides a survey of the existing research on the exposure phenomenon for nonfinancial firms. We suggest that the exposure puzzle may not be a problem of empirical methodology or sample selection as previous research has suggested, but is simply the result of the endogeneity of operative and financial hedging at the firm level. Given that empirical tests estimate exchange exposures net of corporate hedging, both, firms with low gross exposure that do not need to hedge, as well as firms with large gross exposures that employ one or several forms of hedging, may exhibit only weak exchange rate exposures net of hedging. Consequently, empirical tests yield only small percentages of firms with significant stock price exposures in almost any sample. Keywords The Exchange Rate Exposure Puzzle AbstractBased on basic financial models and reports in the business press, exchange rate movements are generally believed to affect the value of nonfinancial firms. In contrast, the empirical research on nonfinancial firms typically produces fewer significant exposures estimates than researchers expect, independent of the sample studied and the methodology used, giving rise to a situation known as "the exposure puzzle". This paper provides a survey of the existing research on the exposure phenomenon for nonfinancial firms. We suggest that the exposure puzzle may not be a problem of empirical methodology or sample selection as previous research has suggested, but is simply the result of the endogeneity of operative and financial hedging at the firm level. Given that empirical tests estimate exchange exposures net of corporate hedging, both, firms with low gross exposure that do not need to hedge, as well as firms with large gross exposures that employ one or several forms of hedging, may exhibit only weak exchange rate exposures net of hedging. Consequently, empirical tests yield only small percentages of firms with significant stock price exposures in almost any sample.

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Section: Exposure To Exchange Rate Risk and The Exposure Puzzlementioning

confidence: 83%

The exchange rate exposure puzzle

2007

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“…Following Bowen, Borgstahler, and Daley (1987), Brown (1993), Martin and Mauer (2003), Walsh (1994), unanticipated operating income is the residual, v it , from a regression of operating income four periods prior on the current operating income, as indicated below 6 :…”

Section: Cash Flow Exposure Estimation Methodsmentioning

confidence: 99%

“…The standardized unanticipated operating income variable, UI it , is derived by dividing the residuals by their standard deviation (e.g., Ball & Bartov, 1996;Martin & Mauer, 2003;Walsh, 1994) for use in Eq. (1).…”

Section: Cash Flow Exposure Estimation Methodsmentioning

confidence: 99%

Scale economies in hedging foreign exchange cash flow exposures

Martin

Mauer

2004

Global Finance Journal

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“…(4) is estimated for each bank as the residual from a regression of the current operating income on the operating income four periods prior (Bowen et al, 1987;Brown, 1993;Walsh, 1994;Martin and Mauer, 2003).…”

Section: Cash Flow Approachmentioning

confidence: 99%

“…Another route to assessing exposure net of hedging is to examine the sensitivity of cash flows to exchange rate movements (Garner and Shapiro, 1984;Walsh, 1994;Chow et al, 1997a;Martin and Mauer, 2003). A cash flow framework captures past exposure patterns and permits a decomposition of exposure into short-and longer-term components.…”

Section: Introductionmentioning

confidence: 99%