Company Value and Economic Currency Risk: an empirical study of UK-listed importers and exporters
This study examines the impact of economic currency exposure on UK share prices using both daily and monthly data. It makes use of survey information to identify two types of firm on the basis of exchange rate sensitivity of their sales volume and input prices, as being either exporters and importers. We then examine the relationship between the exchange rate and the share price of individual firms in our sample of importer and exporter firms. This is done for the period 1990 to June 1997 and the sub-periods October 1990 to August 1992, when the UK participated in the exchange rate mechanism, and August 1995 to June 1997, a period of sterling appreciation. The results showed a stronger currency effect on firm value during the ERM period than when sterling free-floated. The analysis is then extended to examining the effects of a range of individual currencies and indicate that individual firms have very different exposures to particular currencies. Overall our results indicate a weak relationship between our sample firms' share price and changes in the exchange rate. Key Words: economic exposure, foreign exchange, currency risk, firm value.