Mutual fund ownership and foreign exchange risk in Chinese firms

Abstract

We examine the effect of a potentially important external governance mechanism – mutual fund ownership – on the extent to which Chinese firms are exposed to exchange rate movements. Using a sample of 560 firms over the period 2005–2011, we show that greater mutual fund ownership is associated with lower exposure to the US dollar, and that this effect is greatest for firms with higher state ownership. We contend that these findings can be explained by mutual funds ensuring that Chinese firms limit their unhedged dollar-denominated borrowing. This paper contributes to the literature on the benefits to Chinese firms’ shareholders of institutional ownership, and to the growing body of evidence on the favorable effects of good governance on firms’ risk management practices.