Exchange Rates and the Operating Income Performance of Foreign- Based Multinational Corporations
Laurence J. Mauer
Focusing on large foreign-based multinational corporations (MNCs), this firm- level study examines the impact of exchange (FX) rate changes on corporate performance measured as operating income before depreciation and foreign exchange gains and losses. The nature of this linkage is an important precedent to correctly modeling the exchange rate-firm value linkage. The study finds that the national currency/ U.S. dollar exchange rate has significant effects on operating income for 70% of the foreign MNCs. The FX exposure structures vary over a wide range--from positive to negative--with considerable firm- to-firm variation. The findings suggest that both transaction and operating exposures are important, depending on the firm.
In recent years, research in international financial management has been directed toward identifying how companies are affected by fluctuations in foreign exchange (FX) rates. This work has been undertaken based on the assumption that most multinational corporations (MNCs) have exchange rate exposure profiles such that FX changes will affect current and future company cash flows. Previous work has focused on the linkage between contemporaneous foreign exchange rate changes and firm value, as indicated by the value of the firms publicly held equity shares. A number of studies have found only limited support for the impact of contemporaneous rates on firm value ( Jorion, 1990; Amihud, 1994; Bodnar and Gentry, 1993; Bartov and Bodnar, 1994; and Choi and Prasad, 1995). In addition, three studies find statistical relationships suggesting that exchange rates may have a lagged effect on the market value of the MNC firm. 1