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Exchange Rate Sensitivity of Firm Value: Evidence from Nonfinancial Firms Listed on Borsa Istanbul

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Handbook of Research on Emerging Theories, Models, and Applications of Financial Econometrics

Abstract

This chapter attempts to quantify the effect of exchange rate on the value of nonfinancial firms listed on Borsa Istanbul. In the first part of the analysis, the regression results using firm-level data show that currency fluctuations tend to influence the stock returns of 44 firms out of 177 firms in the sample in a significant way with negative average foreign exchange (FX) sensitivity coefficient. The sectoral-level analysis indicates that sectors with net FX short position are also subject to higher FX sensitivity with respect to firm value. In the second part, firm-level determinants of FX sensitivity are investigated using quantile regression method. The estimation results indicate that the market value of firms with net FX position surplus tends to respond positively to the depreciation of Turkish lira against the US dollar across all quantiles. It is also observed that the degree of internationalization, firm size, profitability, and growth opportunities are significant determinants of stock market pricing of FX risk.

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Notes

  1. 1.

    For further discussion, see Doukas et al. (1999), Li et al. (2015), Agyei-Ampomah et al. (2012), Akay and Çifter (2014), and Erdoğan (2016).

  2. 2.

    Due to data limitations, the period before 2007 is excluded.

  3. 3.

    Stock returns are taken in gross forms in compliance with the gross return calculations for exchange rate and orthogonalized market index. Coefficients remain mostly unchanged when 2-year government bond yields are included in estimations.

  4. 4.

    For the calculation of return series of individual firms, exchange rate changes, and market return, daily data is collected as an initial step. Then, weekly return series are created by taking simple averages over the month and retrieving logarithmic changes.

  5. 5.

    The sample range for quantile regression estimations is shorter due to rolling regressions. Also, the data is annual as the balance sheet and income statement data obtained for creating explanatory variables are in annual frequency.

  6. 6.

    The quick ratio, which is also known as the acid test ratio, compares the total amount of cash, marketable securities, and accounts receivable to the amount of current liabilities.

  7. 7.

    It should be noted that in order to account for outliers due to misreporting, the explanatory variables above the 99th percentile on one side or above the 0.5th and 99.5 percentiles on both sides are winsorized.

  8. 8.

    Similar results are obtained when currency basket is used instead of the USD/TRY nominal exchange rate.

  9. 9.

    Similar results are obtained when currency basket is used instead of USD/TRY nominal exchange rate.

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  • Adler M, Dumas B (1984) Exposure to currency risk: definition and measurement. Financ Manag 13(2):41–50

    Article  Google Scholar 

  • Brooks RD, Di Iorio A, Faff RW, Fry T, Joymungul Y (2010) Asymmetry and time variation in exchange rate exposure: an investigation of Australian stocks returns. Int J Commer Manag 20(4):276–295

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    Article  Google Scholar 

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    Article  Google Scholar 

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Author information

Authors and Affiliations

  1. Central Bank of the Republic of Turkey, Ankara, Turkey

    İbrahim Ethem Güney, Abdullah Kazdal, Doruk Küçüksaraç & Muhammed Hasan Yılmaz

Authors
  1. İbrahim Ethem Güney
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  2. Abdullah Kazdal
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  3. Doruk Küçüksaraç
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  4. Muhammed Hasan Yılmaz
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Corresponding author

Correspondence to İbrahim Ethem Güney .

Editor information

Editors and Affiliations

  1. Faculty of Transportation and Logistics, Istanbul University, Avcilar/Istanbul, Turkey

    Burcu Adıgüzel Mercangöz

Appendices

Key Terms and Definitions

Exchange Rate Sensitivity

It is the degree with which firm stock returns are subject to variation when spot exchange rate is fluctuating.

FX Risk

A concept of exposure causing considerable changes in firm assets, equities, and projected income stream stemming from economic, transaction, and translation FX exposure.

Nonfinancial Firms: Firms with main line of business excluding activities of financial services and financial intermediation

Risk Management

Taking positions in financial derivatives like swaps, forwards, and options to hedge against FX risk.

Quantile Regression

Linear statistical estimation technique involving the whole distribution of dependent variable instead of just focusing on conditional mean.

Rolling Regression

Simple OLS regression conducted on a rolling sample periods.

Fama-French Pricing Factors

An asset pricing model developed by Fama and French (1992) that expands on CAPM by controlling for size and value risk components. In other words, it incorporates return on “small minus big” and “high minus low” portfolios obtained from firm size and book-to-market ratio.

Market Value

The amount of value calculated by multiplying the price and number of shares being traded.

Appendix

Table 3 Summary statistics
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Güney, İ.E., Kazdal, A., Küçüksaraç, D., Yılmaz, M.H. (2021). Exchange Rate Sensitivity of Firm Value: Evidence from Nonfinancial Firms Listed on Borsa Istanbul. In: Adıgüzel Mercangöz, B. (eds) Handbook of Research on Emerging Theories, Models, and Applications of Financial Econometrics. Springer, Cham. https://doi.org/10.1007/978-3-030-54108-8_6

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