Exchange Rate Exposure: Does International Involvement Matter?

Abstract

This paper investigates the effect of exchange rate movements on large non-financial firms’ share returns in Malaysia and Singapore using multi-bilateral exchange rates namely the Euro (EUR), US Dollar (USD) and Chinese Renminbi (CNY). Our empirical results show that only a few firms in both Malaysia and Singapore are exposed to exchange rate movements. More firms in Singapore are exposed to exchange rate movements than Malaysia, especially to EUR and CNY. Surprisingly, only three of the large non-financial firms in Singapore are exposed to USD and none in Malaysia. In both Malaysia and Singapore, the majority of the exposed firms have a high level of foreign sales ratio (more than 25%), but in the case of Singapore, it seems that a firm with a low level of foreign involvement (<5%) is also exposed to the studied currencies. The results disclosed that the majority of exposed Singapore firms would mainly benefit from CNY appreciation and USD depreciation, meanwhile Malaysian firms benefited from CNY appreciation and EUR depreciation. The insignificant exchange rate movements in most firms imply that these large firms mitigate the effect of the exchange rate movements through hedging programmes. Future research should include more firms and countries with different levels of market capitalisation to better understand the stylised effect of exchange rate exposure in firm-level analysis.