The Impact of Currency Risk on Firm’s Value in Emerging Countries

Abstract

This study is dedicated to estimating the impact of currency risk on the cost of equity in Brazil, Russia, India and South Africa. Our contribution to the literature is that we obtain further evidence on pricing of exchange rate risk in developing countries which for now is quite scarce. These motivates our research which is dedicated to BRICS capital markets with Chinese stock market excluded since it is heavily regulated. The aim of the research is to determine whether in emerging countries stock markets currency risk is a significant factor that influence cost of equity capital of a company.
 Changes in the value of exchange rate can impact cash flows of a firm and their riskiness, hence, the value of the company. In our research we will discuss the influence of exchange rate movements on the value of the firm through their impact on the cost of equity. Specifically, we investigate whether companies that report substantial currency gains or losses have to pay a higher required return on equity. Furthermore, in this study we take an attempt to estimate currency risk premia for exposure to appreciation and depreciation of currency separately and identify possible differences.
 For each country three models that extend Fama-French Three Factor Model by incorporating currency risk are estimated. We used equal-weighted portfolio approach to construction currency risk factors. They are estimated using information about the ratio of currency gains to sales or the magnitude of covariation between equity returns and exchange rate changes. In the second case appreciation and depreciation of domestic currency against US dollar is considered separately.
 Results indicate that in Russia firms which report substantial currency losses pay a positive risk premium, while in Brazil, India and South Africa companies with significantly positive or negative currency gains pay a lower required return on equity than firms with almost zero currency gains. Finally, we are trying to explain estimation results using sectoral breakdown of product exports in each country of data sample.

Using Derivatives to Hedge Foreign Exchange Exposure in Russia: Academic Research Review

“…However, fundamental quantitative studies are still rare in Russia. The article by I. Kuchin et al [49] is a good example of the latter, as it contributes to international studies confirming investor behavior patterns and differences in importer and exporter positions observed in other markets.…”

“…I. Kuchin et al [49] investigate the impact of currency risk on the cost of equity in BRICS countries, including Russia, by adding currency-risk factors to the Fama-French three factor model. They show that the currency risk premium is positive and significant for companies positively exposed to the depreciation of national currency (exporters) and negative for companies with negative exposure to the national currency depreciation (importers or debtors).…”

Kur Riski ve Kur Riski Yönetiminin Firma Performansına Etkisi

“…Studies examining the effects of exchange rate risk on firm performance and firm value are Runo (2013), Parlak and İlhan (2016), Héricourt and Poncet (2015), and Kuchin (2019).…”