The impact of justified corporate governance changes against exchange rate exposure in North Cyprus

Abstract

This study seeks to use the legally required governance reforms of the Sarbanes‐Oxley Act of 2002, the Financial Reporting Council 2012–2018 and the EU COM 2012–2014 to investigate the relationship between corporate governance performance, exchange rate exposure and hedging by using two governance indexes based on a more comprehensive model previously constructed. The paper is one of the first to adopt the measures that state the importance of internal (corporate culture) and external (corporate legality) governance qualities that help prevent exchange rate exposure and improve trade and hedging. The examination is conducted by using the ARCH and ARMA models as well as a two‐factor and a multiple‐factor model to capture the variations that significantly account for variations in the exchange rate exposure, net trade, and stock market returns. Empirical results revealed that an improvement in corporate governance indexes is associated with a greater reduction in exchange rate exposure, an increase in net trade, and more hedging at the firm level. In addition, adoption of the corporate legality measures has a greater impact on exchange rate exposure and hedging than corporate culture measures.