The Effect of Foreign Exchange Risk and Foreign Exchange Risk Management on Firm Performance

Abstract

It is a known fact that in emerging economies, foreign exchange-based transactions are frequently used in order to achieve economic or financial growth in both country and firm size. As a result of transactions made based on foreign exchange, both countries and companies face exchange rate risk. It is investigated that the effects of the exchange rate risks and foreign exchange rate risk management on the performance of the firm for the Metal Goods, Machinery, Electrical Equipment and Transportation Vehicles Sector in this study. Yearly data for the years 2007-2019 were used in the study. According to the results of panel data analysis, it has been revealed that exchange rate risk and foreign exchange rate risk management reduce firm profitability but do not affect firm value. It was also found in the study that growth, liquidity, leverage and asset turnover are the determinants of foreign exchange risk and foreign exchange risk management. Because of the same results, it is understood that there is not much difference between the exchange rate risk and foreign exchange risk management of firms, that is, they do not sufficiently manage the risks arising from the exchange rate. The results show that business managers need to better manage foreign exchange risks. In addition, it is important that the Central Bank and economic administrations implement policies that will reduce volatility in foreign exchange rates and increase stability.

Keywords

• Foreign Exchange Risk
• Foreign Exchange Risk Management
• Firm Performance
• Firm Value
• Panel Data Analysis

Kur Riski ve Kur Riski Yönetiminin Firma Performansına Etkisi

Abstract

Gelişen ekonomilerde hem ülke boyutunda hem de firma boyutunda ekonomik ya da finansal büyümenin gerçekleştirilebilmesi için dövize dayalı işlemlere sıkça başvurulduğu bilinen bir gerçektir. Dövize dayalı yapılan işlemlerin sonucu olarak hem ülkeler hem de firmalar kur riski ile karşılaşırlar. Bu çalışmada Metal Eşya, Makine, Elektrikli Cihazlar ve Ulaşım Araçları Sektöründe kur riski ve kur riski yönetiminin firma performansı üzerine etkileri araştırılmaktadır. Çalışmada 2007-2019 yıllarına ait yıllık veriler kullanılmıştır. Yapılan panel veri analizi sonuçlarına göre kur riski ve kur riski yönetiminin firma karlılığını azalttığı buna karşılık firma değerini etkilemediği ortaya çıkmıştır. Çalışmada ayrıca büyüme, likidite, kaldıraç ve aktif devir hızının kur riski ve kur riski yönetiminin belirleyicileri olduğu tespit edilmiştir. Aynı sonuçlara ulaşıldığı için, firmaların kur riski ile kur riski yönetimleri arasında farklılıkların pek olmadığı, yani döviz kurundan kaynaklı riskleri yeterince yönetmedikleri anlaşılmaktadır. Sonuçlar, firma yöneticilerinin kur risklerini daha iyi yönetmeleri gerektiğini göstermektedir. Ayrıca Merkez Bankası ve ekonomi yönetimlerinin döviz kurlarında oynaklığı azaltacak, istikrarı artıracak politikaları uygulamaları önem taşımaktadır.

Keywords

• Kur Riski
• Kur Riski Yönetimi
• Firma Performansı
• Firma Değeri
• Panel Veri Analizi

References

1. Abor, J. (2005). Managing foreign exchange risk among Ghanaian firms. Journal of Risk Finance, 6(4). 306-318. https://doi.org/10.1108/15265940510613642
2. Adler, M. and Bernard D. (1980). The exposure of long-term foreign currency bonds. Journal of Financial and Quantitative Analysis, 15, 973–995. Retrieved from: https://www.jstor.org/
3. Adler, M. and Dumas, B. (1980). The exposure of long-term foreign currency bonds. Journal of Financial and Quantitative Analysis, 15(4), 973-994. https://doi.org/10.2307/2330573
4. Adler M. and Dumas B. (1984) Exposure to currency risk: Definition and measurement. Financial Management, 13(2), 41-50. Retrieved from https://www.jstor.org/
5. Aggarwal, R. and Harper, J. T. (2010). Foreign exchange exposure of “domestic” corporations”. Journal of International Money and Finance, 29, 1619–1636. https://doi.org/10.1016/j.jimonfin.2010.05.003
6. Allayannis, G. and Weston, J. P. (2001). The use of foreign currency derivatives and firm market value. The Review of Financial Studies, 14(1), 243-276. Retrieved from https://www.jstor.org/
7. Arellano, M. (1987). Computing robust standard errors for within-groups estimators. Oxford Bulletin of Economics and Statistics, 49(4), 431-434. https://doi.org/10.1111/j.1468-0084.1987.mp49004006.x
8. Bae, S. C., Kim, H. S. and Kwon, T. H. (2018). Currency derivatives for hedging: New evidence on determinants, firm risk, and performance. Journal of Futures Markets, 38(4), 446-467. https://doi.org/10.1002/fut.21894

9. Baltagi, B. H. (2005). Econometric analysis of panel data. England: John & Wiley Sons, Ltd.
10. Bartov, E. and Bodnar, G. M. (1994). Firm valuation, earnings expectations, and the exchange-rate exposure effect. Journal of Finance, 49, 755–1785. Retrieved from https://www.jstor.org/
11. Başçı, E. S. (2003). Vadeli işlem piyasası aracı olarak Swap’ın işleyişi ve finansal piyasalardaki kullanımları. Gazi Üniversitesi Endüstriyel Sanatlar Eğitim Fakültesi Dergisi, 12(1), 18-33. Erişim adresi: https://dergipark.org.tr/tr/pub/esef
12. Beck, N. and Katz, J. N. (1995). What to do (and not to do) with time series cross section data. American Political Science Review, 89, 634-647. Retrieved from https://www.jstor.org/
13. Bhagawan P. M. and Lukose P. J. (2016). The determinants of currency derivatives usage among Indian non-financial firms: An empirical study. Studies in Economics and Finance, 34(3), 363-382. https://doi.org/10.1108/SEF-09-2014-0172
14. Bodnar, G. M. and Gebhardt, G. (1998). Derivatives usage in risk management in U.S. and German non-financial Firms: A comparative survey (National Bureau of Economic Research, Working Paper 6705). Retrieved from https://onlinelibrary.wiley.com/
15. Bodnar, G. M. Gregory S. H., Richard, M. and Charles, S. (1995). Wharton survey of derivatives usage by U.S. non-financial firms. Financial Management, 24, 104–114. Retrieved from https://www.jstor.org/
16. Bodnar, G. M., Hayt, G. H. and Marston, R. C. (1996). 1995 Wharton survey of derivatives usage by U.S. non-financial Firms. Financial Management, 25(4), 113-133. Retrieved from https://www.jstor.org/
17. Bolnick, B. (2004). Effectiveness and economic impact of tax incentives in the SADC Region. Paper presented as a Technical Report submitted to USAID/RSCA SADC Tax Subcomittee, SADC Trade, Industry, Finance and Investment Directorate. Retrieved from https://pdf.usaid.gov/pdf_docs/PNACY929.pdf
18. Breusch, T. S. and Pagan, A. R. (1979). A simple test for heteroscedasticity and random coefficient variation. Econometrica: Journal of the Econometric Society, 47(5), 1287-1294. https://doi.org/10.2307/1911963
19. Breusch, T. S. and Pagan, A. R. (1980). The Lagrange multiplier test and its applications to model specification in econometrics. The Review of Economic Studies, 47(1), 239-253. https://doi.org/10.2307/2297111
20. Dolde, W. (1995). Hedging, leverage, and primitive risk. Journal of Financial Engineering, 4(2). Retrieved from https://papers.ssrn.com/
21. Dominguez, K. M. E. and Tesar, L. L. (2006). Exchange rate exposure. Journal of International Economics, 68(1), 188-218. https://doi.org/10.1016/j.jinteco.2005.01.002
22. Doukas, J. A., Hall, P. H. and Lang, L. H. (2003). Exchange rate exposure at the firm and industry level. Financial Markets, Institutions & Instruments, 12(5), 291-346. Retrieved from https://onlinelibrary.wiley.com/
23. Driscoll, J. C. and Kraay, A. C. (1980). Consistent covariance matrix estimation with spatially dependent panel data. Review of Economics and Statistics, 80, 549-560. Retrieved from https://direct.mit.edu/
24. Du, J., Wang, J. N., Hsu, Y. T. and Lai, K. K. (2018). The importance of hedging currency risk: Evidence from CNY and CNH. Economic Modelling, 75, 81-92. https://doi.org/10.1016/j.econmod.2018.06.007
25. Dufey, G. and Srinivasulu, S. L. (1983). The case for corporate management of foreign exchange risk. Financial Management, 12(4), 54-62. Retrieved from: https://www.jstor.org/
26. Dumas, B. (1978). The theory of the trading firm revisited. Journal of Finance, 33, 1019–1029. Retrieved from https://www.jstor.org/
27. Eatwell, J. (1971). Growth, profitability and size: The empirical evidence. In R. Marris and A. Wood (Eds), The corporate economy: Growth, competition and innovative power (pp. 389-417). London: Macmillan and Co. Ltd.
28. Edwin, A., Azam, A. N. and Bayu, B. (2021) The hedging impact to firm value public companies in Indonesia. Russian Journal of Agricultural and Socio-Economic Sciences, 1(109), 16-22. https://doi.org/10.18551/rjoas.2021-01.02
29. Eicker, F. (1967, January). Limit theorems for regressions with unequal and dependent errors. In L. M. Le Cam and J. Neyman (Eds.), Proceedings of the Fifth Berkeley Symposium on Mathematical Statistics and Probability, Volume 1: Theory of Statistics (pp. 59-82). Paper presented at the Fifth Berkeley Symposium on Mathematical Statistics and Probability. California: University of California Press.
30. Fazzari, S., Hubbard, G. and Petersen, B. (1988). Finance constraints and corporate investment. Brookings Papers on Economic Activity, 1, 141-195. Retrieved from https://www.nber.org/
31. Feld, L. P. and Heckemeyer, J. H. (2011). FDI and taxation: A meta‐study. Journal of Economic Surveys, 25(2), 233-272. https://doi.org/10.1111/j.1467-6419.2010.00674.x
32. Froot, K. A. (1989). Consistent covariance matrix estimation with cross-sectional dependence and heteroskedasticity in financial data. Journal of Financial and Quantitative Analysis, 24(3), 333-355. Retrieved from https://www.jstor.org/
33. Gatopoulos, G. and Loubergé, H. (2013). Combined use of foreign debt and currency derivatives under the threat of currency crises: The case of Latin American firms. Journal of International Money and Finance, 35, 54-75. https://doi.org/10.1016/j.jimonfin.2013.01.004
34. Géczy, C., Minton, B. A. and Schrand, C. (1997). Why firms use currency derivatives. The Journal of Finance, 52(4), 1323-1354. Retrieved from https://onlinelibrary.wiley.com/
35. Haushalter, G. D. (2000). Financing policy, basis risk, and corporate hedging: Evidence from oil and gas producers. The Journal of Finance, 55(1), 107-152. Retrieved from https://onlinelibrary.wiley.com/
36. Hausman, J. A. (1978). Specification tests in econometrics. Econometrica: Journal of the Econometric Society, 46(6),1251-1271. https://doi.org/10.2307/1913827
37. Heckman, C. R. (1983). Measuring foreign exchange exposure: A practical theory and its application. Financial Analysts Journal, 39, 59-65. Retrieved from https://www.jstor.org/
38. Helhel, Y. (2015) Foreign Exchange rate exposure and its determinants on performance of manufacturing firms in Turkey. Research Journal of Finance and Accounting, 6(12), 80-87. Retrieved from https://www.iiste.org/
39. Héricourt, J. and Poncet, S. (2015). Exchange rate volatility, financial constraints, and trade: Empirical evidence from Chinese firms. The World Bank Economic Review, 29(3), 550-578. Retrieved from https://www.jstor.org/
40. Hoechle, D. (2007). Robust standard errors for panel regressions with cross-sectional dependence. The Stata Journal, 7(3), 281-312. Retrieved from https://journals.sagepub.com/
41. Huber, P. J. (1967). The behavior of maximum likelihood estimates under nonstandard conditions. Retrieved from http://www.personal.psu.edu/
42. Kaya, Y., Karakan, G. G. and Visileanu, E. (2019). The impact of foreign exchange movements on Turkish textile sector. Industria Textile, 70(3), 291-297. https://doi.org/10.35530/IT.070.03.1591
43. Kesriyeli, M. Ö. and Yiğit, S. 2005. Corporate sector debt composition and exchange rate balance sheet effect in Turkey (CBT Working Paper, No. 05/16). Retrieved from https://erc.metu.edu.tr/en/system/files/menu/series05/0507.pdf
44. Kıymaz, H. (2003). Estimation of foreign exchange exposure: An emerging market application. Journal of Multinational Financial Management, 13, 71-84. https://doi.org/10.1016/S1042-444X(02)00034-8
45. Kihara, M. and Muturi, W. (2016). The effect of foreign exchange risk management techniques on the financial performance of commercial banks in Kenya. International Journal of Social Science and Information Technology, 2(4), 543, 559. Retrieved from http://www.ijssit.com/
46. Kim, S. F. and Chance, D. M. (2018). An empirical analysis of corporate currency risk management policies and practices. Pacific-Basin Finance Journal, 47, 109-128. https://doi.org/10.1016/j.pacfin.2017.12.004
47. Kuchin, I. Elkina, M. and Dranev, Y. (2019). The impact of currency risk on the value of firms in emerging countries. Journal of Corporate Finance Research, 13(1), 7-27. Retrieved from https://cyberleninka.ru/
48. Lages, L. F. and Montgomery, D. B. (2004). Export performance as an antecedent of export commitment and marketing strategy adaptation evidence from small and medium-sized exporters. European Journal of Marketing, 38(9/10), 1186-1214. https://doi.org/10.1108/03090560410548933
49. Luo, H. R. and Wang, R. (2018). Foreign currency risk hedging and firm value in China. Journal of Multinational Financial Management, 47, 129-143. https://doi.org/10.1016/j.mulfin.2018.11.002
50. Luy, D. D. (2010). Evaluation of credit risk management policies and practices in a Vietnamese Joint-Stock Commercial Bank’s Transaction Office (Unpublished doctoral dissertation). VAMK University of Applied Sciences, Vaasa Finland.
51. Mbabazize, P. M., Daniel, T. and Isaac, E. E. (2014). The role of foreign exchange risk management on performance management of exporting firms in developing countries: A case study of Uganda’s exporting firms. Research Journal of Economics, 2(3), 1-18. Retrieved from http://www.jkuat.ac.ke/
52. Muller, A. and Verschoor, W. (2006). Foreign exchange risk exposure: Survey and suggestions. Journal of Multinational Financial Management, 16(4), 385-410. https://doi.org/10.1016/j.mulfin.2005.09.001
53. Munongo, S., Akanbi, O. A. and Robinson, Z. (2017). Do tax incentives matter for investment? A literature review. Business and Economic Horizons (BEH), 13(1232-2017-2411), 152-168. http://dx.doi.org/10.15208/beh.2017.12
54. Nance, D. Smith, C. and Smithson, C. (1993). On the determinants of corporate hedging. Journal of Finance, 47, 267–284. Retrieved from https://www.jstor.org/
55. Olufem, A. T. (2011). Exchange rate risk exposure of Nigerian listed firms: An empirical examination. International Business Research, 4(2), 219-225. doi:10.5539/ibr.v4n2p219
56. Papaioannou, M. G. (2001). Volatility and misalignments of EMS and other currencies during 1974–1998. International Finance Review, 2, 51-96. https://doi.org/10.1016/S1569-3767(01)02005-2
57. Papaioannou, M. G. (2006). Exchange rate risk measurement and management: Issues and approaches for firms. South-Eastern Europe Journal of Economics, 2, 129-146. Retrieved from https://www.elibrary.imf.org/
58. Parlak, D. and İlhan, H. (2016) Foreign exchange risk and financial performance: The case of Turkey. International Review of Economics and Management, 4(2), 1-15. https://doi.org/10.18825/irem.37893
59. Pesaran, M. H. (2004). General diagnostic test for cross section dependence in panels (IZA Discussion Paper No. 1240). Retrieved from http://ftp.iza.org/dp1240.pdf
60. Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics, 22, 265-312. https://doi.org/10.1002/jae.951 s
61. Rogers, W. (1994). Regression standard errors in clustered samples. Stata Technical Bulletin, 3(13). Retrieved from https://www.stata.com/products/stb/
62. Runo, N. F. 2013. Relationship between foreign exchange risk and profitability of oil companies listed in Nairobi Securities Exchange (Unpublished doctoral dissertation). University of Nairobi, Nairobi, Kenya.
63. Schiozer, R. E. and Saito, R. (2009). The determinants of currency risk management in Latin American nonfinancial firms. Emerging Markets Finance and Trade, 45(1), 49-71. https://doi.org/10.2753/REE1540-496X450104
64. Shapiro, A. (2003). Multinational financial management. New York: Wiley.
65. Šimáková, J. (2017). The impact of exchange rate movements on firm value in visegrad countries. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 65(6), 2105-2111. https://doi.org/10.11118/actaun201765062105
66. Smith, C. W, and Stulz, R. M. (1985). The determinants of firms' hedging policies. Journal of Financial and Quantitative Analysis, 20(4), 391-405. Retrieved from https://www.jstor.org/
67. Srinivasa, V. and Kim, Y. H. (1986). Payments netting in international cash management: A network optimization approach. Journal of International Business Studies, 17(2), 1-20. Retrieved from https://www.jstor.org/
68. Stulz, R. M. (1984). Optimal hedging policies. Journal of Financial and Quantitative Analysis, 19(2), 127-140. Retrieved from https://www.jstor.org/
69. Tafri, F. H., Rahman, R. A. and Omar, N. B. (2011). Empirical evidence on the risk management tools practised in Islamic and conventional banks. Qualitative Research in Financial Markets, 3(2), 86-104. https://doi.org/10.1108/17554171111155339
70. Tatoğlu, F. (2013). Panel veri ekonometrisi, Stata uygulamalı. İstanbul: Beta Yayıncılık.
71. White, H. (1980). A heteroskedasticity consistence covariance matrix estimator and direct test for heteroskedasticity. Econometrica, 48(4), 817-838. Retrieved from https://www.jstor.org/
72. Wooldridge, J. M. (2002). Econometric analysis of cross section and panel data. London: The MIT Press Cambridge.
73. Zee, H., Stosky, J. and Ley, E. (2002). Tax incentives for business investment: A primer for policy makers in developing countries. World Development, 30, 1497-1516. https://doi.org/10.1016/S0305-750X(02)00050-5