Abstract
The sensitivity of a firm's stock return to exchange-rate shocks depends on the firm's exposure factors, hedging practices and how efficient those firm-level information being incorporated in price formation in relation to its exchange rate risk. This study tests for the U.S. non-financial firm stocks by focusing on the issue of lagged effects of exchange rate risk. We first explore the existence of the delay of stock return's response to exchange rate shocks. Then, we test the significance of firm factors in explaining firms' exchange rate risk as being decomposed into the contemporaneous and the delayed responses to exchange rate changes. A fixed-effects model is applied to analyze the relationship between firm characteristics and currency risk. The panel analysis considers the time-varying relationships among variables and takes advantage of expanded observations to yield greater testing power. Empirical evidence indicates that those firms of larger size, with lower international activities and exercising better business hedging experience lower exchange rate exposure. The factors associated with theories of optimal hedging only demonstrate partial impact on a firm's exposure. Interestingly, most factors exhibit lagged effects, and the lagged effects are comparatively stronger for small firms than for large firms. This indicates that certain firm information tends to be ignored or evaluated with a delay by investors, more so for smaller firms, in the valuation process of a stock's exchange rate risk.
Published Version
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