DP15053 The Real Effects of Exchange Rate Risk on Corporate Investment: International Evidence
|Author(s):||Mark Taylor, Zigan Wang, Qi Xu|
|Publication Date:||July 2020|
|Keyword(s):||corporate investment, Exchange rate, uncertainty|
|JEL(s):||F31, G31, G32|
|Programme Areas:||International Macroeconomics and Finance|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=15053|
We empirically investigate the real effects of exchange rate risk on investment activities of international firms. We provide cross-country, firm-level evidence that greater unexpected currency volatility leads to significantly lower capital expenditures. The effect is stronger for countries with higher economic openness and for firms that do not use currency derivatives to hedge. We empirically test the implications of two potential mechanisms: Real options and precautionary savings. Our findings are consistent with both explanations. Two historical events in the FX markets strengthen the identification of our results.