Working Paper: CEPR ID: DP15053
Authors: Mark Taylor; Zigan Wang; Qi Xu
Abstract: 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.
Keywords: exchange rate uncertainty; corporate investment
JEL Codes: G31; G32; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher economic openness (F69) | Greater negative impact of unexpected currency volatility on capital expenditures (F31) |
| Not using currency derivatives (G19) | Greater negative impact of unexpected currency volatility on capital expenditures (F31) |
| Unexpected currency volatility (F31) | Capital expenditures (G31) |
| Higher exchange rate risk (F31) | Increased cash holdings (G19) |