An Empirical Study of the Mystery of Currency Exposure. with the Case of A-Share Listed Companies

Transcription

1 Inernaional Review of Business Research Papers Vol. 8. No.6. Sepember 01. Pp An Empirical Sudy of he Mysery of Currency Exposure wih he Case of A-Share Lised Companies Chen Feixiang Given companies dynamic responses o expeced exchange rae changes, his aricle improves on curren mehods of measuring exposure o foreign exchange rae changes by breaking down he spo exchange rae changes ino expeced changes and unexpeced changes. The currency risk exposure coefficiens resuling from an empirical analysis of 71 Shanghai Sock Exchange A-share lised companies on whose repored performance foreign exchange changes have a direc impac over a period from April 006 o July 009 have a high significance level, hus demonsraing a srong correlaion beween he value changes of A share lised companies and RMB exchange rae flucuaions. Unexpeced changes o exchange raes measure he posiive impac of RMB real appreciaion on company value, whereas expeced changes o exchange raes measure he negaive impac of RMB real appreciaion on ha value. Because he influence of he RMB exchange rae on he value of A-share companies is asymmeric and complex, China should furher accelerae he developmen of an opimal exchange rae managemen sysem, paricularly a he micro-economic level, given he currency risk exposure of lised companies. 1. Inroducion Wih he increasing openness of he naional Chinese economy, he impac of exchange rae changes on economic performance is becoming more obvious and increasingly imporan. A he micro-level of analysis, if all oher condiions are he same, hen he higher he proporion of a company s inernaional operaions, he greaer he effec of exchange rae movemens on he company s value. Similarly, he greaer he magniude of exchange rae changes, he more obvious i is when companies are operaing under his influence. According o heoreical analysis, exchange rae movemens no only affec a company s curren cash flow and profi margin hrough changes in he prices of raw maerials and producs, bu also change he invesmen and financing srucures and asse prices of lised companies because of invesor anicipaion of he company s fuure Chen Feixiang, Deparmen of Applied Economics, Shanghai Jiao Tong Universiy, China. feix@sju.edu.cn

2 cash flow and profi margin, and changes in he liquidiy of he capial marke. However, here is considerable domesic and foreign empirical analysis (Amihud 1994; Bodnar and Genry 1993; Doidge 006; Luo Hang and Jiang Chun 007) ha indicaes ha he impac of exchange rae changes on he asse prices of lised companies (exposure coefficien) is no significan. This issue is called he mysery of currency exposure (Barram and Bodnar, 005; 008). Wheher currency exposure is really imporan or wheher i is he research mehods used o sudy i ha are responsible for he mysery is sill a maer of debae. This paper aemps o improve on curren empirical mehods o clarify he issue. Given companies dynamic responses o expeced exchange rae changes, in his paper we improves on curren mehods of measuring exposure o foreign exchange rae changes by breaking down he spo exchange rae changes ino expeced changes and unexpeced changes. The currency risk exposure coefficiens resuling from an empirical analysis of Shanghai Sock Exchange A share lised companies on whose repored performance foreign exchange changes have a direc impac have a high significance level, hus demonsraing a srong correlaion beween he value changes of A share lised companies and RMB exchange rae flucuaions. The remainder of his paper is arranged as follows. The second par is a lieraure review. The hird par proposes an improved mehod of calculaing currency risk exposure coefficiens and describes reasonable business decision-making behavior and he ques o effecively measure enerprises ha face a real risk of currency exposure based on he classificaion of exchange rae changes. The fourh par samples A-share lised companies, which are obviously affeced by changes in foreign exchange raes, compares he measuremen of currency risk exposure using differen mehods, and analyzes he currency risk exposure in erms of he expeced and unexpeced componens of foreign exchange rae changes. The las par gives a summary of he paper.. Lieraure Review Foreign exchange exposure sudies can be raced back o he 1970s. The impac of exchange rae changes on firm value is defined by Shapiro (1974) and Dumas (1978) as a company s foreign exchange exposure. In heory, his means ha exchange rae changes direcly affec a company s cash flow and profiabiliy by changing he prices of raw maerials and he producs of mulinaional enerprises in local currency, hus affecing he company s marke value. Adler and Dumas (1984) furher disinguish beween currency risk and currency risk exposure, posiing ha currency risk refers o changes in moneary value, whereas currency risk exposure is he volailiy caused by exchange rae flucuaions in he value of a company. The idenificaion of he concep of currency risk exposure srenghened concerns over he impac of exchange rae changes, bu also generaed he basic ideas on he issue of currency exposure. 56

3 Jorion (1990) proposed ha he presen value of fuure cash flows as a measure of he variable value of a company could be represened by he sock price, which laid a good foundaion for subsequen empirical economeric research on currency risk exposure and gradually led o he emergence of a body of lieraure. Barov and Bodnar (1994) added he marke reurn Rm o he analysis of he muual relaions beween exchange rae movemens and he rae of reurn on socks, and obained a specific numerical model ha measured he currency risk exposure coefficiens. The basic equaion was R j R j j x R m j R j, where is he reurn on capial of company j, Rx is he percenage change in he exchange rae, Rx is a consan, Rm represens he sock marke reurn, and j is he error. The degree of currency risk exposure is hen j measured by he exchange rae volailiy coefficien, which reflecs he changes in company profiabiliy ha can be explained by spo exchange rae flucuaions, afer adjusmen for he marke rae of reurn. However, mos empirical research hus far has found ha currency risk exposure coefficiens are no saisically significan, which conradics he heoreical analysis. For example, Jorion (1990) chose 87 U.S. mulinaional companies as he arge and used daa for he period o conduc a regression analysis, and found only a 5.% currency risk exposure among he sample companies a he 5% significance level. In a similar sudy of U.S. companies, Amihud (1994) chose 3 companies idenified as he op 50 exporers by Forune magazine in he period as a sample, and found ha he companies currency risk exposure could no be idenified a a suiable level of saisical significance. In a sudy of companies currency risk exposure across several counries, Bodnar and Genry (1993) found ha only 3% of companies had significan currency risk exposure (a he 10% significance level) across sub-secors in he Unied Saes. In Canada and Japan, which are more open and expor-oriened, only 1% and 5% of indusry currency risk exposure was found o be significan, respecively. Doidge (006) and Griffin and Sulz (001) similarly found only a weak relaionship beween he spo exchange rae changes and price changes. Barram and Bodnar (005) posied he currency risk exposure mysery as he reason for he insignificance of such exposure, raher han problems wih he mehods used in empirical sudies, such as he selecion of samples or periods, because a company can hedge his risk by means of operaional and financial mehods, hus leading o endogenous resuls. The currency risk exposure in empirical analysis is he ne value afer hedging, which ignores he fac ha companies can reduce heir currency risk exposure during operaions by anicipaing his risk. Companies wih high levels of risk exposure in paricular will usually show even muliple ses of hedging means. Chrisopher (006) found ha company managers expec a few insances of exchange 57

4 rae changes, and make he appropriae response in capial allocaion o achieve profi maximizaion. The financial marke iself can also hedge he currency risk caused by unexpeced exchange rae movemens. However, hese inerpreaions do no specify wha mehods could be used o improve he empirical esing of currency risk exposure. In recen years, Chinese research on currency risk exposure has followed he aforemenioned popular empirical mehods. Wei and Qiang (007) analyzed companies currency risk exposure during he exchange rae reform in 005 by selecing 67 companies lised on he Shenzhen Sock Exchange ha already had expor revenue as heir sample and examining he size of he currency risk exposure coefficien and sign. They found a a 10% significance level ha seven companies had a coefficien wih a posiive sign (negaive effec) and 1 had a coefficien wih a negaive sign (posiive effec), which cumulaively means ha 8% of he risk exposure was significan. Hang and Chun (007) conduced an empirical analysis of he currency risk exposure of companies in he Shanghai A-share marke afer he exchange rae reform in 005, and concluded ha 1.6% of he lised companies benefied from he appreciaion of he RMB and 4.3% were negaively affeced. However, only 17.1% of all companies had significan exposure risk (10%). The conclusions of he wo sudies are similar o hose of foreign empirical analyses. Wheher he issues surrounding currency risk exposure are due o errors in he heoreical logic or he failure of he exising mehods of empirical analysis is he subjec of debae. Observaions of real economic operaion indicae ha he laer answer is undoubedly he correc one: he curren inernaional financial crisis has been an impressive wake-up call. I is difficul o explain why in an open economy he presence of currency risk exposure is denied. The auhors believe ha he mysery of currency risk exposure, which has been exensively discussed, exiss simply because exising ess of such exposure have serious flaws. For example, mos sudies simply ake spo exchange rae changes ino accoun when examining changes in he value of a company, which underesimaes he degree of currency risk exposure in real economies. Based on his reasoning, we hypohesize: H1: The currency exposure exiss when beer mehodology is used o es i, and he key poin is how o measure he change of exchange raes in real life. Given he premise ha managemen and allocaion funcions in he marke are raional, currency risk exposure should raher be measured based on he classificaion of exchange rae changes, and he real exchange risk exposure coefficien should be measured from he perspecive of unexpeced exchange rae changes o generae more reasonable policy conclusions. Formally: H: Unexpeced exchange rae changes are more suiable han expeced ones for measuring real exchange risk 58

5 exposure coefficiens. The opening up of China s economy is coninually expanding and deepening, and he relaionship beween he operaing condiions of companies and he RMB exchange rae is clearly becoming closer. Since he iniial opening up of is economy, China has conduced several significan exchange rae sysem reforms. Now, he basic formaion is a manageable floaing exchange rae sysem, and he effecs of marke supply and demand changes on he RMB exchange rae are becoming eviden. I is foreseeable ha he imporance of he accidenal or unpredicable aspecs of he RMB exchange rae will gradually increase. On he one hand, here will ineviably be flucuaions in naional economic developmen, which may cause changes in he RMB exchange rae. On he oher hand, oher counries in he world economy are also changing, and here are many uncerain facors ha will ineviably lead o exchange rae flucuaions. Considering he complexiy of he inernaional financial markes, fuure changes in he RMB exchange rae are likely o be much more uncerain. The risk of exchange rae movemens and currency risk exposure hus meri sudy. 3. The Concepual Framework and Empirical Model Direc observaion of exchange rae changes is usually achieved hrough spo exchange rae movemens, which are very complex in subsance. According o he efficien marke heory, changes in price end o reflec a range of inegraed marke informaion, and spo exchange rae changes can and should be regarded as he resul of a combinaion of differen marke informaion, which has complex effecs on he marke. Here, spo exchange rae changes ha can be direcly observed are defined as he nominal exchange rae, which is hen spli ino expeced and unexpeced exchange rae movemens. According o heory, differen ypes of exchange rae changes have differen effecs on corporae behavior, and hus bring differen forms of currency exposure risk. We believe ha he nominal exchange rae movemen is insufficien as a sandard measure of he nominal currency risk exposure, and ha i is irraional o only use his indicaor. I is more reasonable o measure he rue comprehensive currency risk exposure wih a combinaion of differen mehods. 3.1 Classificaion of Exchange Rae Changes Based on Expecaion Spo exchange rae changes are similar o changes in commodiy prices, and o a cerain exen are regarded as expeced resuls. This is because an expeced spo exchange rae iself can cause changes in he exchange rae, which means ha changes in he spo exchange rae are, o some exen, predicable. Of course, some spo exchange rae changes are unpredicable. Based on his assumpion, we ake he logarihm of he spo exchange rae (local currency/foreign currency) and decompose i ino expeced and unexpeced changes, as expressed by he formula 59

6 Feixiang ln x ln e u, (1) ln e ln, () e 1 where ln x is he logarihm of he observable spo exchange rae changes (or he nominal exchange rae) and ln e is he logarihm of he expeced exchange rae movemens. I is assumed ha equaion () follows a sochasic rend and a random walk process wihou drif. Unexpeced changes unrelaed, and are subjec o N(0, ) u and he impac of changes are N(0, ) and. The assumpion of normal disribuion means ha here is a high probabiliy of observing small changes and a low probabiliy of observing a high variance resuling from long-erm value changes. In a real economy, companies ofen make he appropriae decomposiion of changes in he spo exchange rae objecively, and adjus heir corporae decision-making accordingly. For example, when making decisions, enerprise managers, a leas in par, have heir own expecaions of changes in he exchange rae, and ac accordingly o maximize profis, raher han simply and negaively acceping an overall change in he nominal exchange rae. Nominal exchange rae movemens and expeced exchange rae changes can be easily observed in business managemen decision-making. This is because spo exchange rae movemens reflec boh fundamenal changes and emporary deviaions from he fundamenal value. When managers hink ha changes are fundamenal, hey will adjus heir decisions on capial srucure. However, for unexpeced exchange rae changes caused by insallmens and emporary delays in delivery, a company may prefer o use financial producs raher han adjusing decisions abou capial srucure. 3. Expeced Exchange Rae Changes and Company Value Wih reference o Barram and Bandar s explanaion for he mysery of currency risk exposure, we consider companies ha paricipae exensively in inernaional rade. Managemen goals for hese companies are based on known informaion and curren condiions, and seek o maximize he presen value of profis. Assuming ha a company s echnology is in line wih he Cobb-Douglas funcion, where K is capial sock, I is physical invesmen, E is he expeced exchange rae change based on informaion during period, is he discoun facor, e is he expeced exchange rae change, P is he price of oupu, and P I is he price of new invesmen, he company s greaes value is V E 0 i r r I e P A K P I. (3) i i i i i i 60

7 Assuming he profi funcion Feixiang e PTK L w L, shor-erm profi maximizaion maximizes he oupu of he labor inpu, where T and w are he echnology and wage rae, respecively, relaive o L. Going back o he profi funcion, we obain e P r r A K 1,, where 1 1, A ( T / ) w ( / w ) 0 for inegraed echnology, and can prove ha he value of A is posiive and non-random. All oher condiions being consan, o maximize he value of he company is o maximize he use of capial. The usage scale of capial is hus K, (4) ( 1 ) K 1 I 1 where is he capial depreciaion rae, assuming ha invesmen coss are incurred in he curren period bu will urn o oupu in he nex period. This ime lag means ha he company canno immediaely adjus he capial srucure o respond o changes in supply and demand and problems of delivery delay, and he curren invesmen decision-making deermines he capial srucure of he nex phase. However, managemen can make appropriae forecass of changes in he fuure exchange rae and adjus curren invesmen o influence he size and srucure of capial. By subsiuing (4) ino (3) and including he uni oupu prices, we can derive he larges invesmen. According o equaions (1) and (), exchange rae changes: is defined as a noise signal effec on long-erm S log x log xx 1 u, (5) where u is he unexpeced change in he nominal exchange rae movemen. Assuming signal S E (log ) log ( ) and oher relevan informaion e S e 1 E S, and using a signal exracion formula for he variance, we can obain he signal o noise raio is E( S ) S, where 1 Le n 1 (1 ) m 1 61

8 Finally, he profi growh raio can be expressed as 1 A log 1 1 log 1 1 S 1S1 n 1 A. (6) The conclusion from equaion (6) is ha changes in corporae profis can be divided ino four pars. The firs par comprises he company revenue direcly affeced by expeced exchange rae changes, and he second par is he company revenue ha is direcly affeced by unexpeced exchange rae changes. The hird and fourh pars are he effecs resuling from changes in coss and echnology. To simplify he analysis, i is assumed ha he impac of changes in cos and echnology is consan, and ha he effecs of expeced and unexpeced exchange rae movemens on firm value are concenraed. This gives a new measuremen for he indicaors of currency risk exposure. 3.3 Currency Risk Exposure Measure Based on Expeced Changes in Exchange Rae Movemens Curren empirical research on currency risk exposure regards spo exchange rae change as a direc indicaor for he calculaion of he relevan parameers. Obviously, his gives a nominal value for currency risk exposure. However, i may be ha defecs in he logic of his approach have caused he failure o generae saisically significan resuls. The analysis in he previous secion indicaes ha spo rae changes resul from a complex signal. Afer a company has made a forecas of fuure exchange rae movemens, i will ake appropriae measures o reduce is currency risk exposure. Thus, he empirical measuremen of currency risk exposure facors mus ake exchange rae expecaions ino accoun, bu focus also on observaions of he unexpeced coefficien of currency risk exposure. Here, he measures of currency risk exposure proposed by Barov and Bodnar (1994) and ohers are ransformed, which allows us o consruc he following empirical model. R i = 1i +β 1i Rmk +β i EX +β 3i UN + e i =1,,T. (7) Here, R i is he rae of reurn on company i in period, 1i is he consan erm, Rmk is he rae of reurn on he curren marke porfolio, EX is he expeced exchange rae movemen, and UN is he unexpeced exchange rae movemen. The exchange raes used are direc quoaions, ha is, hey are he RMB per dollar price. e i is a random error for par of he period. The parameer β i obained from he regression analysis is he expeced currency risk exposure coefficien of company i, and β 3i is he unexpeced currency risk exposure coefficien, boh of which reflec he sensiiviy of he company s sock reurn o differen ypes of exchange rae changes. By making hese changes o he model, we believe ha he conclusions drawn from he analysis will be more consisen wih heoreical sudies. A he same ime, he model should beer measure 6

9 companies real currency risk exposure, which will lead o more reasonable policy recommendaions. 4. Daa Sources and Empirical Resuls 4.1 Main Sources of Daa Rae of reurn on company R i. The sample of lised companies is obained hrough hree seps. Firs, we selec non-financial companies from he Shanghai and Shenzhen 300 Index whose exchange rae changes on cash in heir cash flow saemen is non-zero. This includes posiive or negaive effecs of exchange rae changes on cash flow, and means ha we include only sample companies on which i is clear ha exchange rae changes have had an impac. From he Wind daabase, we selec he closing price Pi (where i denoes firm i and represens he monh ) on he las rading day of each monh from April 006 o June 009, which gives 38 monhs of daa. We hen use a differenial equaion wih a logarihmic P i, R i =Ln(P i )-Ln(P i-1 ), o obain he companies raes of reurn. Finally, we examine he ime series R i wih he ADF uni roo saionery es o idenify 71 companies wih a value of less han he 5% criical value, and generae a seady sequence for he empirical analysis. These 71 companies are involved in a range of indusries, including ranspor, engineering consrucion, railway infrasrucure, wine and food, compuers, aerospace, finance, building maerials, ranspor and logisics, pharmaceuicals, machinery, seel, real esae, coal, educaion, media, and oher areas. Marke porfolio reurn, Rmk. From he Wind financial informaion erminals, we obain he closing price Pmk of he monhly marke index (Shanghai and Shenzhen 300 Index) from April 006 o June 009, a oal of 38 monhs. We hen use he Log funcion on Pmk and he differenial equaion Rmk =Ln(Pmk )-Ln( Pmk) o calculae he corresponding marke rae of reurn. Afer examining he marke rae of reurn for he ime-series daa wih he ADF uni roo es, we find ha equals -7.3, or less han a he 1% significance level, which means he series is sable. Spo exchange rae change, Spo. The spo exchange rae SX is regarded as he closing price of he middle quoaion of he RMB agains he US dollar, as direcly quoed in he Exchange Daabase of he Bank of China. represens monhs. The period also runs from April 006 o June 009. Taking he log funcion of LnSX, he percenage change in he spo exchange rae is Spo =Ln(SX )-Ln(SX -1 ). We also examine spo wih he ADF uni roo es, and find a value of -11.1, less han he value a he 1% significance level, which means ha he series is sable. Expeced exchange rae changes, Ex. Par of he expeced exchange rae changes can be refleced by he previously used measure of forward premium/discoun (Harris, Marr 63

10 and Spivey 1991; Choi and Prasad 1995), where expeced exchange rae changes in period can be refleced by he premium/discoun ( FX 1 SX 1 ) / SX 1 in period -1. The Barov and Bodnar (1994) currency risk exposure equaion is R i = 1i +β 1i Rmk +β i spo + e, =1,,T. From his, we obain Ex = ( FX 1 SX 1 ) / SX 1, where he forward rae FX is he closing price of he six-monh forward rae direcly quoed for he RMB agains he US dollar as obained from he Foreign Exchange Daabase of he Bank of China for he Sepember 005 o March 009 period (corresponding o he spo exchange rae from April 006 o June 009 afer six monhs). Afer examining Ex wih he ADF uni roo es, we obain a value of , which is less han a he 1% significance level, indicaing ha he series is sable. Unexpeced exchange rae movemens, Un. I is imporan for he signal exraced from whie noise in he ARIMA process (Fang and Loo 1994) o be represenaive, which involves exracing residuals in he changes in he spo exchange rae from April 006 o June 009. To do his, we firs examine he daa wih he ADF (Dicky-Fuller 1979) uni roo es as a saionary es. The basic es equaion includes he inercep, and akes he firs order difference of S (d = 1). The seleced lag erm follows he AIC and SC crieria. We hen make judgmens according o he graphics of he auocorrelaion and parial auocorrelaion funcion. Taking he firs order difference on S, he seleced lag coefficien of 16, and he resuls of he correlaion funcion (ACF) and parial auocorrelaion funcion (PACF), we esimae he value wih he ARIMA process. The resuling daa, including he consan erm and all of he coefficiens, are no greaer han he value a he 5% significance level. Finally, for he residual es, we follow he Correlogram-Q-saisics mehod and selec he lag order 36. The Q saisic is hen 1.8 and he P value is 0.18, and hus we canno rejec he null hypohesis, which indicaes ha here is no significan auocorrelaion in he residuals (he es process is lenghy and is omied for he sake of breviy, bu is available upon reques from he auhors). 4. Analysis of Empirical Resuls We use he improved model, which decomposes he exchange rae changes ino expeced and unexpeced pars (Equaion 7), o measure he currency risk exposure of A-share lised companies, our resuls are consisen wih hypoheses 1 and and he resuls show a good level of saisical significance. If he spo rae were regarded as an independen variable, hen he resuls would no pass he saisical ess wih he same daa. For comparison, Table 1 shows he currency risk exposure coefficiens of he A share lised companies wih he wo mehods, from which i can be seen ha among he 71 sample companies, only 13 (18.3%) of he companies have a nominal currency risk exposure coefficien less han he value a a significance of 5% level (p < 0.05), and only 19 (6.76%) companies nominal currency risk exposure coefficien is less han he 64

11 value a he 10% significance level (p < 0.1). The resuls are similar o hose of previous empirical research in which he currency risk exposure was no significan. However he expeced and unexpeced currency risk exposure coefficiens of 31 (18.3%) companies are less han he value a he 5% significance level. The coefficien for 41 (57.7%) of he companies is below he 10% level. These resuls pass he es according o he majoriy principle. The empirical resuls no only explain ha he mysery of currency risk exposure is due o defecs in he measuremen, bu also make some sense of he real siuaion. 65

12 Table 1: Empirical resuls for he currency risk exposure of A share lised companies using differen measuremens Model 1: Currency risk exposure coefficiens calculaed wih spo exchange raes Adjused R Currency risk exposure coefficiens T Value P Value Mean Median Sandard deviaion Variance Max Min Number of companies significan a 5% level Number of companies significan a 10% level Model : Currency risk exposure coefficiens calculaed wih expeced and unexpeced exchange raes Adjus ed R Expeced exchange rae changes Unexpeced exchange rae changes Currency Currency risk exposure coefficien T Value P Value risk exposure coefficien T Value P Value β i β 3i Mean Median Sandard deviaion Variance Max Min Number of companies significan a 5% level 31 Number of companies significan a 10% level 41 Noe: he significance level for he risk coefficien is 5% 66

13 Firs, we find ha here is a generally observed risk of currency exposure among A-share lised companies. The empirical resuls show ha he majoriy of companies currency risk exposure coefficiens pass he significance es, and ha he value of he correlaion is relaively large. Regardless of wheher expeced or unexpeced changes are used as he dependen variable, he changes in he value of A-share lised companies are very sensiive o exchange rae changes. For example, he average expeced currency risk exposure coefficien βi is 0.711, he maximum is 1.715, and he minimum is The average unexpeced coefficien β3i is -.396, he maximum is 3.368, and he minimum is The currency risk exposure coefficiens pass he significance es wih boh dependen variables. To some exen, he daa indicae ha exposure o foreign exchange risk has become an unavoidable problem for A-share lised companies. However, generally speaking, he exposure o unexpeced currency risk facors is greaer han he expeced risk, and he analysis indicaes ha he unexpeced currency risk exposure beer reflecs he rue coefficien of currency risk exposure, which means ha he acual currency risk exposure faced by A socks is no low. Second, real RMB appreciaion has a posiive impac on A-share lised companies when unexpeced exchange rae movemens are used as he measuremen. The empirical resuls show ha he unexpeced risk exposure coefficien β3i is negaive, and wo hirds of he company coefficiens are negaive, which shows ha he real appreciaion of he RMB can increase he value of a company in general. Noe ha he quoaion used in he empirical analysis is a direc quoaion, where a negaive number means ha appreciaion has a posiive relaionship wih he reurn on asses. A large number of foreign (Booh and Roenberg 1990) and domesic (Hang and Chun007) sudies have found a similar resul ha currency appreciaion helps o improve a company s value. The heory suggess ha his is because he appreciaion of he RMB helps o reduce he coss of impored machinery, equipmen, and raw maerials, which has a posiive impac on he developmen of he real economy. The benefis are paricularly obvious when a company focuses on he domesic marke. However, he appreciaion of he RMB may also enhance he marke price of asses. Given China s promising economic prospecs, RMB appreciaion is likely o boos sock prices, and indeed his is easily observed in real life. Thus, mos A-share lised companies will benefi from he real appreciaion of he RMB. Third, real RMB appreciaion has a negaive impac on A-share lised companies when he expeced exchange rae movemen is used as he measuremen. The empirical resuls show ha here is a posiive relaionship beween expeced currency movemens and firm value (he mean βi is posiive and mos of he company coefficiens are posiive), and again due o he use of direc quoaion, we can infer ha he expeced appreciaion of he RMB has a negaive impac on he growh value of A share lised companies. This is no difficul o explain in heory, and expor orders consiue an example of his. A presen, China s expor producs are primarily labor inensive. There is a considerable amoun of processing rade, and he profis are quie modes. When here is a clear expecaion of RMB appreciaion, companies are more hesian o accep 67

14 orders, which impedes he fuure expansion of he producion scale. Similar effecs may also be observed wih foreign invesmen and overseas projec conracing. There is a grea difference beween he impac of he real appreciaion and expeced appreciaion of he RMB. Pu simply, he former has an impac on fuure business decisions, whereas he laer affecs he changes in value in he process of operaion. To sum up, empirical sudies sugges ha here are wo imporan characerisics of he impac of RMB exchange rae movemens on company value. The firs is complexiy. In realiy, changes in he spo exchange rae of he RMB affec he value of A-share lised companies hrough wo mechanisms. In he process of appreciaion, he magniude and iming is o some exen unpredicable, bu objecively he appreciaion of he RMB can sill enhance he marke value of a company. Expeced appreciaion of he RMB will cas a company s fuure business decisions, such as expor orders and overseas projec conracing, ino confusion. Thus, we should no simply regard he impac of RMB appreciaion as negaive or posiive. A second consideraion is is asymmery. The parameers obained from he empirical sudy show ha he impac of unexpeced exchange rae changes on firm value is significanly greaer han expeced (hey are derived from he same equaion and he same uni of measuremen). Tha is, exchange rae changes have more effec on acual business processes, including greaer uncerainy. Hence, he currency risk exposure arising from unexpeced exchange rae changes beer reflecs he rue risks ha enerprises face. 5. Conclusions An improved model, which decomposes he exchange rae changes ino expeced and unexpeced pars, is used o measure he currency risk exposure of A-share lised companies, our resuls are consisen wih hypoheses 1 and and he resuls indicae he influence of RMB exchange rae movemens on company value is quie imporan and complex, which o a large exen eliminaes he he mysery of currency risk exposure idenified in previous domesic and inernaional research. We empirically sudy A-share lised companies idenified in heir repors as being affeced by foreign exchange changes. The resuls pass he significance es, and indicae ha mos lised companies face a high currency risk exposure, which in urn means ha here is a close relaionship beween changes in company value and he RMB exchange rae. RMB appreciaion has a posiive impac on he value of a company when he unexpeced exchange rae is used as he measuremen. However, RMB appreciaion has a negaive impac on he value of he company when he expeced exchange rae is used as he measuremen. The impac of spo exchange rae changes canno and should no simply be judged as posiive or negaive, because economic operaions have complex and asymmeric characerisics. The currency risk exposure of A-share lised companies offers a special 68

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