Operational Currency Mismatch and Firm Level Performance: Evidence from India

Dhasmana, Anubha (2013): Operational Currency Mismatch and Firm Level Performance: Evidence from India.

Abstract

This paper looks at the determinants and effects of exchange rate exposure using data on 500 Indian firms over the period 1995-2011. Unlike the existing papers in the literature, we use a measure of `operational` currency exposure based on foreign currency revenues and costs of firms. Among other factors, exchange rate volatility appears as a significant determinant of average firm level exposure with the direction of relationship supporting the presence of `Moral Hazard` in firm’s risk taking behavior. Further large `operational` exposure is associated with significantly lower output growth, profitability and capital expenditure during episodes of large currency depreciation at the firm level. Together this indicates that the policy makers must take into account the incentive effects of their intervention in foreign exchange markets.

• Item Type: MPRA Paper
• Language: English
• Keywords: Operational Currency Exposure, Moral Hazard, Exchange Rate Volatility
• Subjects: F - International Economics > F0 - General > F00 - General; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

References

Adler, M. and B. Dumas, 1984,``Exposure to Currency Risk: Definition and Measurement," Financial Management , Vol. 13, 41-50.

Arellano, M. and O. Bover, 1995, `` Another Look at the Instrumental Variable Estimation of Error-Components Models``, Journal of Econometrics, Vol. 68, 29-51.

Bai, J. and P. Perron, 2003, “Computation and Analysis of Multiple Structural Change Models," Journal of Applied Econometrics, Vol. 18, 1-22.

Bodnar, G. M. and M. H. F. Wong, “Estimating Exchange Rate Exposures: Some "Weighty" Issues," Technical Report, NBER, 2000

Bodnar, G.M. and R.C. Marston, ”A Simple Model of Foreign Exchange Exposure,” Working Papers, University of Pennsylvania, Wharton School, Weiss Center, Link: http://finance.wharton.upenn.edu/weiss/wpapers/2000/00-3.pdf

Dominguez, K. M. and L. L. Tesar, “Exchange rate exposure,” Journal of International Economics, Volume 68, January 2006, 188-218.

Eichengreen, Barry, Ricardo Hausmann, and Ugo Panizza, 2007, “Currency Mismatches, Debt Intolerance, and the Original Sin: Why They Are Not the same and Why It Matters,” in Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, edited by Sebastian Edwards, NBER, University of Chicago Press

Goldberg, P. and M.M. Knetter,” Goods Prices and Exchange Rates: What Have We Learned?” Journal of Economic Literature, 1997, vol. 35, issue 3, 1243-1272

Goldber, L.,” Exchange Rates and Investment in United States Industry,” The Review of Economics and Statistics, Vol. 75, No. 4, November 1993, 575-588

Goldberg, L. and J.M. Campa,” Investment in Manufacturing, Exchange Rates and External Exposure,” Journal of International Economics, Volume 38, Issues 3–4, May 1995, 297–320

Goldberg, L. and J.M. Campa,” Investment, Pass-Through and Exchange Rates: A Cross-Country Comparison” International Economic Review, Vol. 40, No. 2, May 1999, 287-314

Goldstein, M. and P. Turner, “Controlling Currency Mismatches in Emerging Market Economies,” April 2004, Institute of International Economics, Washington

Gupta, P., D. Mishra and R. Sahay,”Behavior of Output During Currency Crisis,” Journal of International Economics , Volume 72, Issue 2, July 2007, 428-450

Hong, K. and A. Tornell,” Recovery from a Currency Crisis: Some Stylized Facts,” Journal of Development Economics, Volume 76, Issue 1, February 2005, 71–96

Hutchinson, M.M. and I. Noy,” How Bad Are Twins? Output Costs of Currency and Banking Crises,” Journal of Money, Credit, and Banking, Volume 37, Number 4, August 2005, 725-752

Jorion, P., “The Exchange-Rate Exposure of U.S Multinationals," The Journal of Business, Volume 63, July 1990, 331-345

Lane, Phillips R. and Gian Maria Milesi-Ferretti,” The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970–2004,” Journal of International Economics Volume 73, Issue 2, November 2007, 223–250

Nucci, F. and A.F. Pozzolo,” Investment and the Exchange Rate: An Analysis with Firm-Level Panel Data,” European Economic Review, Volume 45, Issue 2, February 2001, 259–283

Parsley, D. C. and H. A. Popper, “Exchange rate pegs and foreign exchange exposure in East and South East Asia," Journal of International Money and Finance, Volume 25, October 2006, 992-1009.

Ranciere, Romain, Aaron Tornell, and Athanasios Vamvakidis, 2010, “Currency Mismatch, Systemic Risk and Growth in Emerging Europe,” Economic Policy, Volume 25, Number 64, October 2010, 597-658

Shah, Ajay and Ila Patnaik, “Does the Currency Regime Shape Un-hedged Currency Exposure?”, Journal of International Money and Finance, Volume 29, Issue 5, September 2010, 760–769