Foreign exchange risk management by Malaysian public-listed multinational companies

• Main Author: Regupathi, Angappan
• Other Authors: Prodhan, Bimal
• Published: University of Hull 2000
• Subjects: 332; Business
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.342975

This research investigated 1.how Malaysian public-listed multinational companies manage foreign exchange (FX) risk, and 2.what factors influence the companies' inclinations to undertake particular FX risk management (FERM) activities. Data were collected using questionnaires, from November 1997 to April 1998, from 106 of the 169 Malaysian-owned non-financial multinational companies listed on the Kuala Lumpur Stock Exchange (KLSE) in mid-1996. FERM practices were measured using 54 research variables that can be grouped into seven categories - 1.management of FX risk, 2.FX exposure type, 3.FERM objective, 4.FERM responsibility, 5.FERM centralisation, 6.FERM policies and procedures, and 7.FERM techniques. While the findings were broadly similar to other studies in developed Western countries, some key differences were noted. Companies in Malaysia, compared to those in the West, seem more willing to manage FX risk, but appear to have less capacity, need, and opportunity, to undertake sophisticated FERM practices. They also seem less able to centralise their domestic subsidiaries' FERM. Logistic regression analyses were used to identify possible predictors and their conditional effects on the companies' inclinations to undertake selected FERM activities, using 23 predictor variables that can be grouped into seven categories - 1.company size, 2.debt and leverage, 3.equity ownership, 4.listing board and sector, 5.FX involvement, 6.intra-company transactions, and 7.perceived FX risk attributes. Notwithstanding some shortcomings in the study, the findings suggested many new predictor effects, and indicated that the most important predictors, in descending order, are 1.FX exposure characteristics, 2.company size, 3.debt and equity, and 4.intracompany transactions. They also highlighted the importance of, and the differences in, the effects of various FX exposure dimensions - particularly, 1.perceived exposure, 2.individual exposure and exposure component, and 3.exposure ambiguity, apart from actual total exposure size.