Foreign Exchange Exposure: An Investigation of the Determinants in the UK Multinationals

Abstract

The purpose of this study is to investigate the determinants of differential exchange exposure across listed UK Multinational Corporations (MNCs) from 1993-2013, so as to identify their relationships regarding their foreign operations as listed on the FTSE 350 Index. The study used quantitative analysis to reach its conclusions. This involves a time series regression analysis which was used to compute the foreign exchange exposure co-efficient. The conclusions from this analysis are summarized. Data was collected from accounting footnotes of financial statements from FAME and the DataStream on Compustat Geographical system database; while annual data updated annually about trade weights within the region was obtained from the International Monetary Fund’s Directory of Trade statistics yearbook. The results suggest that 20% of the sampled MNCs have statistically significant exposure at the 5% level significance, and the regression estimates of the determinants of exchange rate exposure suggests that, the level of a firm’s foreign sales, market value of its equity, and quick ratio, have strong combined explanatory power for exposure. The cross-sectional differences in the degree of exchange rate exposure are negatively related to firm size and positively related to the degree of foreign operation. Firm liquidity is shown to be a determinant of exchange exposure. Other firm characteristic variables have weak or are of no significance in terms of explaining exposure. The results from this empirical study build upon prior studies on foreign exchange exposure and offer the MNCs an alternative approach to minimize their inputs when operating in a developed market.