Abstract
Exchange rate fluctuation is phenomenal in South Africa. This study thus estimates the impact of exchange fluctuation on the profitability of listed mining and manufacturing companies over 2000-2014. The study controlled for company level factors including liquidity, leverage, firm size, tangibility, the opportunity for growth and interest cover. The macroeconomic factors controlled for were interest rate and economic growth. The study used random effect model for estimation. Profitability was measured as return on asset. Exchange rate fluctuation had a significant negative impact on return on the asset when both industries are considered. However, exchange rate fluctuation had no significant impact on return on the asset in the mining industry but in the manufacturing industry. Liquidity, Interest cover, and tangibility had a significant positive impact but leverage had a significant negative impact on return on asset. At the macro level, interest rate had a significant positive impact but economic growth had no significant impact on return on asset. The study recommends that managers of manufacturing companies should adopt strategies such as currency swaps, future contract, and hedging to avert exchange rate fluctuation risk.Keywords: Exchange Rate; mining companies; Profitability; South AfricaJEL Classifications: F41; L72; L25; O55DOI: https://doi.org/10.32479/ijeep.8208
Highlights
Foreign exchange market is the largest financial market in the world due to increased globalization of companies and international trade
Exchange rate fluctuation, company level factors affect profitability and this study focused on leverage, firm size, the opportunity for growth, liquidity, interest coverage, and tangibility
Listed mining companies had higher return on asset (ROA) than listed manufacturing companies and this is significant at 5%
Summary
Foreign exchange market is the largest financial market in the world due to increased globalization of companies and international trade. Commercial and investment banks are the major agents in this market. The forces of demand and supply determine the price within the financial market (Stephen et al, 1998). Global trade encompasses diverse currencies; the foreign exchange rates variability is a potentially stimulating factor that drives profitability levels of firms as it affects their monetary intermediation process (Chiira, 2009). It is a fact that there is no country that can be selfreliant so they all transact commercial activities with each other, foreign exchange rates become accessible. Some scholars have subjected the exchange rate and profitability relationship to empirical studies with varied outcomes
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