Foreign exchange exposure of Indonesian listed firms

Foreign exchange exposure or exchange rate exposure is the risk that a firm’s cash flows and earnings may be affected by exchange rate movements. For multinationals that have several subsidiaries overseas, exchange rate movements may have an adverse effect on a huge number of contractual transaction...

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Main Authors: Mohamad, Azhar, Anisak, Nurul
Format: Article
Language:English
English
English
Published: Sage Publishing 2019
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http://irep.iium.edu.my/73401/12/73401_Foreign%20exchange%20exposure%20of%20Indonesian%20listed%20firms.pdf
http://irep.iium.edu.my/73401/13/73401_Foreign%20exchange%20exposure%20of%20Indonesian%20listed%20firms_WoS.pdf
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https://journals.sagepub.com/doi/abs/10.1177/0972150919843371?journalCode=gbra
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spelling my.iium.irep.734012021-01-25T00:33:59Z http://irep.iium.edu.my/73401/ Foreign exchange exposure of Indonesian listed firms Mohamad, Azhar Anisak, Nurul HG3810 Foreign exchange Foreign exchange exposure or exchange rate exposure is the risk that a firm’s cash flows and earnings may be affected by exchange rate movements. For multinationals that have several subsidiaries overseas, exchange rate movements may have an adverse effect on a huge number of contractual transactions. The exchange rate movements may have an impact on future cash flows, generated by the firm’s production and marketing operations. For example, a rising Indonesian rupiah may result in Indonesian goods becoming more expensive, leading to Indonesian exporters selling less in the future, resulting in unfavourable future cash flows. Lower future cash flows mean the firm’s stock valuation may decline and investors may not be attracted to investing in the firm’s stock. In this paper, we examine the effect of exchange rate movements on Indonesian listed firms’ stock prices using a multivariate model with six bilateral exchange rates. We further add a generalized autoregressive conditional heteroskedasticity (GARCH (1,1)) model for each of 100 Indonesian listed firms’ monthly closing prices from the period of January 1994 through to November 2015, and the GARCH (1,1) results are summarized and presented in Tables 1–4, 7 and 8. We find a total of 80 per cent of our sample firms to have significant exchange rate exposure. The overall results show that most of the Indonesian listed firms under study are exposed to Japanese yen, Great Britain pound and Malaysian ringgit. We posit that this sensitivity of their stock prices may be due to the fact that most of these Indonesian firms are net importers. Interestingly, the agricultural sector comes out as the most stable sector, having the least exposure and exhibiting stable performance during the Asian financial crisis of 1997/1998. For overall exchange rate exposure across all firms, we run a pooled generalized least squares model. We find that the exchange rate exposure of the Indonesian sample firms is time-variant, or in other words, very much dependent on the subperiods (before crisis, during crisis and after crisis) under study. Sage Publishing 2019-04-23 Article PeerReviewed application/pdf en http://irep.iium.edu.my/73401/7/73401_Foreign%20Exchange%20Exposure%20of%20Indonesian%20Listed%20Firms_Scopus.pdf application/pdf en http://irep.iium.edu.my/73401/12/73401_Foreign%20exchange%20exposure%20of%20Indonesian%20listed%20firms.pdf application/pdf en http://irep.iium.edu.my/73401/13/73401_Foreign%20exchange%20exposure%20of%20Indonesian%20listed%20firms_WoS.pdf Mohamad, Azhar and Anisak, Nurul (2019) Foreign exchange exposure of Indonesian listed firms. Foreign Exchange Exposure of Indonesian Listed Firms, 20 (3). pp. 1-19. ISSN 09721509 E-ISSN 09730664 https://journals.sagepub.com/doi/abs/10.1177/0972150919843371?journalCode=gbra 10.1177/0972150919843371
institution Universiti Islam Antarabangsa Malaysia
building IIUM Library
collection Institutional Repository
continent Asia
country Malaysia
content_provider International Islamic University Malaysia
content_source IIUM Repository (IREP)
url_provider http://irep.iium.edu.my/
language English
English
English
topic HG3810 Foreign exchange
spellingShingle HG3810 Foreign exchange
Mohamad, Azhar
Anisak, Nurul
Foreign exchange exposure of Indonesian listed firms
description Foreign exchange exposure or exchange rate exposure is the risk that a firm’s cash flows and earnings may be affected by exchange rate movements. For multinationals that have several subsidiaries overseas, exchange rate movements may have an adverse effect on a huge number of contractual transactions. The exchange rate movements may have an impact on future cash flows, generated by the firm’s production and marketing operations. For example, a rising Indonesian rupiah may result in Indonesian goods becoming more expensive, leading to Indonesian exporters selling less in the future, resulting in unfavourable future cash flows. Lower future cash flows mean the firm’s stock valuation may decline and investors may not be attracted to investing in the firm’s stock. In this paper, we examine the effect of exchange rate movements on Indonesian listed firms’ stock prices using a multivariate model with six bilateral exchange rates. We further add a generalized autoregressive conditional heteroskedasticity (GARCH (1,1)) model for each of 100 Indonesian listed firms’ monthly closing prices from the period of January 1994 through to November 2015, and the GARCH (1,1) results are summarized and presented in Tables 1–4, 7 and 8. We find a total of 80 per cent of our sample firms to have significant exchange rate exposure. The overall results show that most of the Indonesian listed firms under study are exposed to Japanese yen, Great Britain pound and Malaysian ringgit. We posit that this sensitivity of their stock prices may be due to the fact that most of these Indonesian firms are net importers. Interestingly, the agricultural sector comes out as the most stable sector, having the least exposure and exhibiting stable performance during the Asian financial crisis of 1997/1998. For overall exchange rate exposure across all firms, we run a pooled generalized least squares model. We find that the exchange rate exposure of the Indonesian sample firms is time-variant, or in other words, very much dependent on the subperiods (before crisis, during crisis and after crisis) under study.
format Article
author Mohamad, Azhar
Anisak, Nurul
author_facet Mohamad, Azhar
Anisak, Nurul
author_sort Mohamad, Azhar
title Foreign exchange exposure of Indonesian listed firms
title_short Foreign exchange exposure of Indonesian listed firms
title_full Foreign exchange exposure of Indonesian listed firms
title_fullStr Foreign exchange exposure of Indonesian listed firms
title_full_unstemmed Foreign exchange exposure of Indonesian listed firms
title_sort foreign exchange exposure of indonesian listed firms
publisher Sage Publishing
publishDate 2019
url http://irep.iium.edu.my/73401/7/73401_Foreign%20Exchange%20Exposure%20of%20Indonesian%20Listed%20Firms_Scopus.pdf
http://irep.iium.edu.my/73401/12/73401_Foreign%20exchange%20exposure%20of%20Indonesian%20listed%20firms.pdf
http://irep.iium.edu.my/73401/13/73401_Foreign%20exchange%20exposure%20of%20Indonesian%20listed%20firms_WoS.pdf
http://irep.iium.edu.my/73401/
https://journals.sagepub.com/doi/abs/10.1177/0972150919843371?journalCode=gbra
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