The Effect of Floating Exchange Rates on SME Performance

This paper studies the effect of floating exchange rates (XRs) on the competitive environment and the performance of UK small and medium sized enterprises (SMEs). Using an innovative technique that separates XR exposures into those that increase stock market returns and those that reduce them, it provides evidence that floating XRs have a generally negative effect on the competitive environment for SMEs. The effect is weaker for the euro and reflects the economic integration of the UK with the other EU economies. Focusing on SMEs in conventional firm-by-firm regressions, it provides evidence that SME exposure to exchange rate (XR) fluctuations differs significantly in sign and magnitude from that of the largest 250 UK firms. It also shows that individual SMEs are generally unable to overcome the negative competitive effects introduced by the floating XR. Both depreciations and appreciations of the XR have a predominantly negative effect on returns for all SMEs, for all years, for all industries and for all currencies, although it is weaker for the euro. There is no significant difference between exporters and non-exporters at any conventional level. We also document that exposures vary over time in response to changing economic conditions and firm specific circumstances