Operational Currency Exposure and Firm Level Performance: Evidence from India
Macroeconomic Analysis and International Finance
ISBN: 978-1-78350-755-9, eISBN: 978-1-78350-756-6
Publication date: 26 April 2014
Abstract
Purpose
To study the determinants and effects of “Operational” exchange rate exposure resulting from the mismatch between cost and revenues of the firms by using data on 500 Indian firms.
Design/methodology/approach
We conduct detailed empirical analysis of the determinants of firm level exposure and their impact using panel regression techniques and conduct several robustness tests to confirm the validity of these results.
Findings
Among other factors, exchange rate volatility appears as a significant determinant of average firm level exposure with the direction of relationship supporting the presence of “Moral Hazard” in firm’s risk-taking behavior. Further large “operational” exposure is associated with significantly lower output growth, profitability, and capital expenditure during episodes of large currency depreciation at the firm level.
Research limitations/implications
This paper leaves several questions to be answered. Further research is called for to explore the nature of distortions in the production process encouraged by exchange rate volatility and their impact on firm level productivity. Looking at the relationship between the use of financial and operational hedges is another fruitful area of future research.
Practical implications
Our results have important implications for policy makers worried about mitigating the impact of exogenous shocks. Implicit and explicit guarantees with regards to the value of exchange rate tend to raise the vulnerability of the economy to exchange rate shocks at same time that they encourage capital expenditures and possibly output growth during “normal” times. Our findings indicate that the policy makers must take into account the incentive effects of their intervention in foreign exchange markets.
Originality/value
Unlike the existing papers in the literature, we use a measure of “operational” currency exposure based on foreign currency revenues and costs of firms. In most of the existing papers the focus is on the mismatch between the currency denomination of assets and liabilities. Little attention has been paid to the currency mismatch between costs and revenues of the firms. Such “operational” mismatches are potentially equally important and deserve attention of policy makers and academics alike.
Keywords
Acknowledgements
Acknowledgments
I would like to thank the participants of 17th International Conference on Macroeconomic Analysis and International Finance, the editors, and an anonymous referee for their extremely valuable comments. All the remaining errors belong to the author.
Citation
Dhasmana, A. (2014), "Operational Currency Exposure and Firm Level Performance: Evidence from India", Macroeconomic Analysis and International Finance (International Symposia in Economic Theory and Econometrics, Vol. 23), Emerald Group Publishing Limited, Leeds, pp. 59-84. https://doi.org/10.1108/S1571-038620140000023003
Publisher
:Emerald Group Publishing Limited
Copyright © 2014 Emerald Group Publishing Limited