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
Date Revised: June 2021
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.