Foreign exchange exposure effects on the value of Mexican companies

• Main Author: Elomaa, J. (Jonna)
• Format: Dissertation
• Language: English
• Published: University of Oulu 2019
• Online Access: http://jultika.oulu.fi/Record/nbnfioulu-201905081648

Abstract. This thesis aims to investigate the exchange rate fluctuations’ effect on firm value by looking at the relationship between price index returns and changes in exchange rates using price indices from ten industries in Mexico over a time period 1996–2018. The aim is to find out whether there are differences in the results gotten between industries, time periods and exchange rate measurements used. The thesis consists of three parts. In the first part the theoretical framework is constructed, and existing empirical evidences are presented in order to justify the relevance of the study. The theoretical framework is constructed on the base of currency supply and demand, which create the existence of exchange rates. The concepts of exchange rate risk and exposure are built on these main definitions in order to understand the importance of the topic. Later on, the relationship between the exchange rates and firm value is explained by the exchange rate exposure puzzle. Previously conducted researches are used in order to understand the current situation of the area of study and to choose the methodological approach for the research. The research is conducted by running several two-factor regressions, first explanatory variable being the market return and second one the measurement of the changes in exchange rate. The data sample is gathered from DataStream from a time period 1996–2018. The time period is chosen in order to exclude specific events, hence assuring unbiased results gotten. The results of the study indicate that Mexican firms’ values in seven out of ten investigated industries are positively affected by the contemporaneous appreciation of the home currency. Cross-sectional differences between different industries are detected and the most affected industries are found to be the ones involved in international trade, especially with the USA. The effect of developing economy conditions are also discussed as a possible reason behind the gotten results supported by the previously published studies. The purpose of this thesis is to provide a country-specific study on developing economy perspective to the area of exchange rate exposure studies. The study aims to challenge the existing literature and to find support to the previously conducted developing economy — based researches in the same area. The aim of this research is not to provide information about the firm specific components of exchange rate exposure but instead to look for the more general guidelines in order to understand the industrial differences during different time periods.