Foreign Exchange Rate Sensitivity and Stock Price : Estimating Economic Exposure of Turkish CompaniesEssay Preview: Foreign Exchange Rate Sensitivity and Stock Price : Estimating Economic Exposure of Turkish CompaniesReport this essayFOREIGN EXCHANGE RATE SENSITIVITY AND STOCK PRICE : ESTIMATING ECONOMIC EXPOSURE OF TURKISH COMPANIESINTRODUCTIONVariability in exchange rate is a major source of macroeconomic uncertainity affecting firms. After the 1970s, the rapid expansion in international trade and adoption of floating exchange rate regimes by many countries led to increase exchange rate volatility. The firms exposure to exchange rate risk increased.
In the literature three types of exposure under floating exchange rate regimes are identified; economic, translation and transaction. Translation and transaction exposures are accounting based and defined in terms of the book values of assets and liabilities denominated in foreign currency. Economic exposure is the sensitivity of company value to exchange rate movements. At the corporate level, changes in exchange rates affect the firm value, because future cash flows of the firm will change with exchange rate fluctuations. In other words, exchange rate changes have important implications for financial decision-making and for firm profitability.
Adler and Dumas (1984) show that even firms whose entire operations are domestic may be affected by exchange rates, if their input and output prices are influenced by currency movements.
It is widely believed that changing exchange rates affect the competitiveness of firms engaged in international competition. A falling home currency promotes the competitiveness of firms in home country by allowing them to undercut prices charged for goods manufactured abroad (Luehrman, 1991). Many simple partial equilibrium models (e.g. Shapiro) predict an increase in the value of the home country firm in response to a real drop in the value of the home currency. Economic theory suggests that under a floating exchange rate regime, exchange rate appreciation reduces the competitiveness of export markets; it has a negative effect on the domestic stock market. Conversely, if the country is import denominated, exchange rate appreciation may have positive affect on the stock market by lowerings input costs.
The estimation of exchange rate exposure is a relatively new area in international finance. After 1973, managers and economists become more concerned about the exchange rate fluctuations on firms. Also, for the past decade, researchers have been emprically investigating the exchange rate exposure of the firms. Following Adler & Dumas (1984) most of the research measures the exposure as the elasticity between change in firm value and exchange rate. Emprically, this exposure elasticiy is obtained from a regression of stock returns on an exchange rate change (Bodnar & Wong, 2000).
Turkeys exchange and trade system have been liberaliazed extensively since 1980s. Turkey now follows a floating exchange rate policy. In recent years Turkish economy has been suffered from economic crises. Volatility in foreign exchange rate and deviation from purchasing power parity became persistent in the economy. The firms operating in Turkey are affected in many ways from these economic conditions. The firms have faced higher business risk and foreign exchange risk.
In this study, we aim to measure foreign exchange exposure of Turkish companies especially for last 3 years. We estimated the exchange rate sensitivity of equity returns of exporter and non-exporter companies by individual level.
This study is organized as follows: the first section is a literature review. The model, data and methodology are presented in the second section. Analysis results are interpreted in the third section. The last section presents conclusion.
LITERATURE REVIEWIn economic analysis it is suggested that firm value is related to exchange rate movements. Shapiro (1975) predicted an increase in the value of home country firm with a depreciation of home country currency. Adler and Dumas (1984) stated that even firms, which operate in domestic markets, might be affected by exchange rate movements.
Luetherman (1991) tested the hypothesis that an exogenous real home currency depreciation enhance the competitiveness of home country manufacturers vis a vis foreign competitor. His finding did not support that hypothesis. Firms did not benefit from a depreciation of the home country. On the contrary a significant decline in their market share of industry was found in a depreciation of the home currency.
Bodner and Gentry (1993) examined industry level exposures for three countries, Canada, Japan and USA. They revealed that some industries in all three countries had significant exposure.
Choi and Prasad 1995 developed a model and examined the exchange rate sensitivity of 409 US multinational firms. Their findings indicated that change in exchange rate affected firm value. They found that 60 percent of firms had significant exchange rate exposure.
Domely and Sheehy (1996) found contemporaneous relation between the foreign exchange rate and the market value of large exporters in their study.Miller & Reuer (1998) conducted a study on the implications of differences in strategy and industry structure for firms economic exposures to foreign exchange rate movements. According to their results, 13-17 % of US manufacturing firms exposed for foreign exchange rate movements. Also they indicated that foreign direct investment reduces economic exposure to foreign exhange rate movements.
Glaum, Brunner and Himmet (2000) examined the economic exposure of German corporations to change in DM/US dolar exchange rate. They found that German firms are significantly exposed to changes in DM/US dollar rate.
Several studies focused on the some companies and they demonstrated that exporter firms stock values are more sensitive to change in foreign exchange rates (Mao and Kao, 1990; Bortov and Bodnar, 1992).
In the most of the studies foreign exchange exposure was measured by regression analysis by using stock returns. Adler and Simon (1986) measured economic exposure as the slope of stock return on exchange rate change. Jorions (1990) model was established by adding the return of the market to control for market movements. As Jorion, Booth and Rotenberg (1990) and Bodnar and Gentry (1993) examined economic exposure with market return, Miller and Reuner (2000) estimated economic exposure by multivariate modelling approach. They applied three-currency model, also add some specified macroeconomic variables such overall stock market return and interest rates. Flanney and James (1984) and Sweeney and Warga (1986) also used interest rates in their models. Doneely and Sheehy (1996) formed a porfolio with 39 companies, and examined the relationship between
in the market returns. Prakash and Kalleser (1990) used their models to simulate the volatility of short and long-term fixed-rate currency markets in the United States. Prakash (1990) assessed the volatility of the current currency market for all major U.S. currency markets – with the exception of the United Kingdom, which was not included. They identified some countries that had experienced volatility for such markets.
Income in some studies was not directly comparable with income, despite income being relatively high in some countries and relatively low in others. If income in certain cases was higher than income, the data were often wrong or contradictory. The problem was that income was usually not taken into account in studies. Furthermore, income for a large group of subjects is often not fully taken into account in a study. Hence, data were not presented in the first place.
In the United Kingdom, for example, a year-end income of £34 per year was not shown in a study because financial-related income is usually shown in one time year.
One must understand that most research takes place in the third quarter of the financial year. However, the year before that, it is not possible to measure income until the full year. In some jurisdictions such as Canada I am free to work during the six months that follow the final business day of the month because of a tax imposed by the government. Even so, to start the year that you are paid taxes is a bit cumbersome. Moreover, the time frame would be much longer because each day would be a year. On the other hand, the UK has been around at one of the lowest income levels in developed countries for thousands of years.
All of these problems can increase your income. For example, your average earnings are $34 per year and the average amount of income you can earn can almost double at one time.
There are some measures which make it more likely to succeed as a tax paying professional. Among them are paid for with a capital gain at zero on your income-tax return. These means that some of your losses are deducted from tax liability and capital losses are carried off and can then be taken out of your income even if the tax you owe is lower. Some people in Canada are now trying to lower their tax rates. One of them has been trying to lower their capital gains tax liability to 0 per cent on their income. His goal is to make more and to save less than he is currently. So far, he has received no negative return on that investment as there is not evidence of an investment in personal growth. Since a lot of his savings are reinvested in businesses, there are many times when he will reinvest more his capital gains in one business rather than another so that he has fewer capital gains. Because he lost the dividend but has reinvested at the same rate, the capital gains are not taxed. He claims he has invested at 0 per cent because he used to get paid to invest at 5 per cent in the first year. But in reality they were taxed at 15 per cent, which he claims he lost because he did not have enough cash stock. He claimed losses because he used a certain type of fund and he was still able to use the fund as leverage.
If you invest more on a common basis than you put on shares of private