Foreign Exchange Exposure and Stock Returns: Evidence from Multinational Corporations in Taiwan

Using data for 541 Taiwanese listed companies over the 1994-2009 period, this paper examines the effect of unexpected exchange rate exposure on the value of the enterprise and the determinants of exchange rate exposure in Taiwan. The empirical evidence shows that about 25% of listed companies suffer exchange rate exposure risk and this condition becomes more severe when the economy contracts. We also investigate the determinants of exchange rate exposure. Two categorical variables are included: the first describes the firm's business operations and the second the firm's financial characteristics. The empirical evidence shows that the size of the company and book-to-market value has negative effects on the exchange rate exposure. Besides, we find that the quick ratio and age of firms have nonlinear U-shaped effects on exchange rate exposure.