Firm-Specific Exchange Rate Exposure of Japanese Multinational Corporations

This paper empirically examines the firm-specific exchange rate exposure of Japanese multinational corporations (MNC). Although financial theory strongly supports that exchange rate movement should affect the value of a multinational corporation, most previous studies failed to document significant exchange rate exposure. One major reason for the failure is the incorrectly selection of the exchange rate index. In this paper, using detailed exchange rate data, we propose a method to construct a firm-specific exchange rate index for each Japanese MNC. Our results show that with a more appropriate firm-specific exchange rate index, we can better capture the exchange rate exposure of MNCs. Moreover, when incorporating a crisis indicator in the standard model to capture the impact of crisis on exchange rate exposure, we get more firms with significant exposure. This result indicates that crises may have a different impact on MNC's exchange rate exposure than periods of normal exchange rate fluctuation