Abstract
It is generally acknowledged that one of the risks faced by any company is FX risk, especially when the business operates internationally. For individual companies, exposure to FX risk results in different financial implications, stressing such parameters as the industry affiliation and the company’s size with respect to the level of FX risk exposure. In this paper we analyse how FX exposure of companies of different size and operating in industrial and service sectors affects their stock market returns. Using the panel regression with macroeconomic and companies’ specific factors for 208 European companies analysed over the period 2012–2018, we show that the link between changes in the exchange rate and the stock return is statistically significant and that medium-size companies as well as firms operating in the service sector of economy are more exposed to this impact.
Highlights
It is generally acknowledged that companies universally experience market, interest and FX risks, especially when they operate internationally
Performance of even small domestic companies may worsen due to undesirable movements of exchange rate, because there are still some indirect channels of potential impact and small companies are usually not hedged against FX risk
Hypotheses Before we specify the basic theoretical model used in this paper, we will formulate the main hypotheses for testing: Hypothesis 1: Changes in foreign exchange rate have statistically significant impact on stock returns of European companies
Summary
It is generally acknowledged that companies universally experience market, interest and FX risks, especially when they operate internationally. Consideration of the size and industrial effects in the relationship between FX risk and company’s stock price is not overly popular in the financial literature, and those pieces of research which exist within this topic to date give ambiguous results. Another aspect of this topic is a different exposure to exchange rate movements of various companies. Performance of even small domestic companies may worsen due to undesirable movements of exchange rate, because there are still some indirect channels of potential impact and small companies are usually not hedged against FX risk
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