The estimated coefficients for the contemporaneous and lagged exchange rate variables show a wide range of foreign exchange exposure patterns among the firms in the sample. The majority of the MNCs have exchange rate responses that are unidirectional, that is a given exchange rate change results in either all negative or all positive effects on operating income. In the lagged cases where operating exposure plays a greater role, it takes some time for companies to change their business practices and for these changes to have an effect on operating income. The statistical results reflect the systematic elements of these linkages.
The absolute values of the exchange rate coefficients are, on average across all firms, of similar orders of magnitude, ranging from lag 3: .641 to lag 5: .188. Most notably, the average response coefficient for the contemporaneous exchange rate value was central within that range at lag 0: .377. Considering only firms for which the optimal model was the contemporaneous exchange rate, the average response coefficient was somewhat higher at .540, but still within the range.
Finally, the nationalities of the companies in the foreign MNC sample are heavily weighted toward Canada. The principal reason for this is the heavy representation of Canada among the initial 33 MNC company set: 27 or 80% of the initial 33 company set. This proportion is maintained in the 23 equations identified as having statistical significance at the ten percent level or lower. Simply, the data availability for Canadian-based MNCs is greater than for MNCs from other nations. In reference to Table 9.2, there appears to be some evidence that Canadian companies are more directly and immediately affected by changes in the C$/ U.S.$ exchange rate.
The question of how foreign exchange rate changes affect corporate performance is a major issue in international financial management. Most research in this area has focused on the relationship between exchange rates and stock prices for U.S.-based MNCs. The preponderance of this work identifies only limited support for this important relationship. The present study seeks to advance our understanding of a precedent dimension of corporate performance: the effect of FX rates on corporate operating income.
Previous studies suffer from one or both of the following problems: focus on aggregations across companies and the use of weighted average exchange rate indices. These difficulties are avoided in this study.
The linkage between FX rates and operating income is explored using polynomial distributed lag regression procedures. The study is conducted at the company level for a sample of 33 foreign-based MNCs. The data are quarterly, from 1986 to 1994, covering 1188 company-quarter data points. The exchange rate variable is the national currency/ U.S. dollar rate, depending on the nationality of the foreign-based MNC.
Significant linkages are found for 70% (or 23 firms) of the companies in the sample. Contemporaneous exchange rates emerge as the preferred model in 35%