Study on the relationship between exchange rate fluctuation and stock return: Evidence from listed companies in China

Abstract

The purpose of this paper is to evaluate the foreign exchange risk exposure and its determinants of listed companies on the Shanghai and Shenzhen Stock Exchange based on panel data over the period July 2005 to July 2011. The risk evaluation model and determinants model are built to estimate the sensitivity of stock returns to exchange rate fluctuation and examine the influence of financial indexes on exchange risk. The findings are shown as follows: (1) Listed companies in China have significant exposure to foreign exchange risk and firms are damaged by the appreciation of RMB-USD. (2) From an average level, U.S. dollar exchange rate fluctuations influences three industries remarkably, which are transportation, mechanical electrics and textile and garment industry. (3) The exchange risk exposure of companies are affected greatly by the firm's market value of equity (SIZE), dividend payout ratio (DIV), quick ratio (QR), and long-term debt ratio (DE), and the level of export ratio (EXPR), while firms are not significant to book-to-market equity value (BM). Generally speaking, the larger size, the higher export ratio and quick ratio a firm has, the greater foreign exchange risk exposure it will have. While the higher dividend payout ratio and long-term debt ratio a firm has, the less risk exposure it will have.