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1 Exchange rate exposure and foreign exchange rate of Malaysian consumer products listed companies Abstract Edem Okon Akpan Department of Accountancy, Federal Polytechnic Bauchi Tel: , It is believed that foreign exchange rate movements have an effect on companies value (share price) and making it vulnerable in the competition of the global market. It concerns with the cash flows and share price values of the companies. The objective of this study was to determine the correlation between foreign exchange rate exposure and Malaysia s listed companies share prices in Bursa Saham, Malaysia. The study used time series data from the period 31st December, 1999 until 31st December, companies of consumer products from Bursa Saham Malaysia were selected among 54 public listed companies of consumer product sector and exchange rate of seven different currencies were taken into account. The finding showed that there is a high percentage of significance of the correlation between the share prices of all the fifteen (15) companies against the monthly exchange rates of seven foreign currencies; (1) MYR/USD, (2) MYR/JPY, (3) MYR/ EUR, (4) MYR/GBP, (5) MYR/CHF, (6) MYR/SGD, and (7) MYR/CNY exchange rates. The correlation analysis between the companies monthly share prices and monthly exchange rates showed that all of the companies have almost equal economic exposures. Also, the finding indicated that exchange rate influenced economic exposures of fifteen (15) companies used in this study. The results suggested using an additional regression analysis method in producing more accurate results. Keywords: Exchange rate, share price, economic exposure, consumer product sector Journal of of Management 17

2 1. Introduction In the growing global economies, it is believed that foreign exchange rate movements have an effect on companies value (share price) and making it vulnerable in the competition of the global market. The effect may concern the cash flows and share price values of the companies. On the contrary, Hsiao (2012) argued that varieties of currencies can affect a company s value or share prices even for a local company that is not involved in global trade, but studies are yet to examine this claim particularly in developing country such as Malaysia. In line with the efficient-market hypothesis (EMH), the situation between exchange rate movements and company s value (share prices) should be observed, because the market can be vulnerable where any inefficient information on market trends might upset the investment of individuals (Hsiao, 2012). Thus, there is a need to analyze the correlation between foreign exchange rate exposures and share prices of Malaysia s listed companies in Bursa, Malaysia. For instance in Malaysia, it is believed that economic exposure assessment between companies share prices and exchange rates are currently active in Malaysia s foreign exchange rate movements. The study by Kiymaz, (2003) also pointed that there is a strong correlation between exchange rate exposure and share price. This type of analysis is known as measurement of assessing economic exposures. Based on this scenario, the present study examines the correlation between foreign exchange rate exposures and share prices of Malaysia s listed companies in Bursa, Malaysia with particular focus on the consumer product sector. The paper has five sections. Section two reviews extant literature; section three presents the methods for collecting and analyzing data; section four presents the results of the paper; conclusion is presented in the final section. 2. Literature review In previous studies, exchange rate volatility remains a major risk factor that companies around the globe are exposed to, as it affects their cash flow and the value of domestic and foreign assets and liabilities. According to Pramborg (2004), transaction (economic) exposure Journal of Management 18

3 to currency risk refers to potential changes in the value of future cash flows as a result of unexpected changes in exchange rates. For instance, when home currency of multinational companies weakens against other currencies, it attracts more demand for its goods at the international scene due to a lower price and vice versa. Also, the amount remittance by subsidiaries to parent companies as profit is exposed to exchange fluctuation. Due to this risk exposure, investors and managers are now interested to know the impact of currency changes on company s value. One of the earlier studies on foreign exchange exposure was done by Adler and Dumas (1984), where they described the exchange rate exposure as the effect of foreign exchange rate movements on cash flows. Usually, the term cash flows refers to the company s value (stock value). However, a study done by Jorion, (1990) used different variables. The author assessed the foreign exchange rate changes against stock returns and the market index (control variable) using a regression analysis approach. The result of the study shows that only fifteen (15) companies from 287 US multinational companies have a significant exchange rate exposure at the 5% significant level. Consequently, many researchers (e.g. Glaum, Brunner & Himmel, 2000; Dominguez &Tesar, 2006) were inclined to follow his footsteps. Glaum, Brunner and Himmel, (2000) examined the exchange rate exposure of German companies against changes in the DM/USD exchange rate for the period between 1974 and The study finds that German firms are significantly exposed to changes in the DM/ USD rate. Since the time frame of the study is considered long-time span, the results were believed to be unstable. A similar study was done by Dominguez and Tesar, (2006). In their study of the exchange rate exposure of publicly listed firms in non-us industrialised and developing countries, they found that 20 percent of these firms are indeed exposed to the weekly exchange rate movements. This indicates that the exchange rate movement matters to certain companies. Which company will be exposed is subject to the specific exchange rate and diversifies over time. Journal of of Management 19

4 Hsiao and Han, (2012) however, investigated the sensitivity of the company s share prices against exchange rate, daily fluctuations by aiming on a sample of individual companies in Taiwan from three different industrial sectors (i.e. electronics, textiles and plastics), instead of depending on the market portfolio. The results are consistent with previous studies (e.g. Glaum, Brunner & Himmel, 2000) where a positive correlation between foreign exchange rate exposure and company value exists in Taiwan. Meanwhile, Fraser and Pantzalis (2004) investigated the relationship between movements in foreign exchange rates and share prices of multinational companies in the United States using the foreign exchange indices. They found that companies have significant economic exposure when a common foreign exchange rate index is tested compared to testing the currency rate. In their regression analysis, the average exposure to exchange risk can be analyzed by using regression on the returns of share prices against the movements in the prices of currencies (exchange rates). Such studies, however, are not many in Malaysia. For instance, Rim and Mohidin, (2005) have examined the relationship between exchange rate and share prices at the industry level in Malaysia. The data period of the study was between June, 1996 and August, 1999, where the period of Asian financial crisis. The result showed that there is a significant relationship between exchange rate changes and share prices. This suggests that the movements in exchange rates have different effects on share prices across different industries. This study differs from the study done by Rim and Mohidin, (2005) where the relationship is examined after the period of the Asian financial crisis until the year Apart from that, this study also uses the sample of companies from one particular industry which is the consumer product industry. The details about the methodology of the study are explained in the subsequent section. Below is the research hypothesis for this study. H0: There is no significant relationship between exchange rate exposure and companies share price. Journal of Management 20

5 Methods Research design The study adopted a cross-sectional research design with quantitative survey approach (Lucky & Minai, 2011; Minai & Lucky, 2011; Minai,Lucky&Olusegun,2011). These authors affirmed that both cross-sectional design and quantitative research approach of survey questionnaire are suitable in a social science study like this. It is faster and easier in terms of gathering information within a limited time. Population and sampling technique The population of the study covered all the 54 Malaysia s listed companies in Bursa Malaysia of consumer products. The sample size only covered 15 companies of Malaysia s listed companies in Bursa Malaysia of consumer products selected through simple random sampling technique. The study used secondary data obtained from DataStream (through on a monthly basis including seven exchange rates. Concerning the sampling technique and sample size, the study used a simple random sampling technique to select 15 companies from the total population of 54 companies. Thus, the total sample size for this study is 15 companies listed in the Bursa Malaysia. Apart from that, the selected companies were also subjected to the following criteria below: i. The data cover from time period 1999 until 2012 monthly. ii. iii. All the companies listed in KLSE market. Consumer product industry only. In terms of time frame, these selected companies have had share prices from the period between December, 31st 1999 and December, 31st The proposed time frame is sufficient to examine the variability of economic scenario because it covers various scenarios such as economic recession and development, political turmoil, etc. Journal of of Management 21

6 Data collection procedure Since the study used secondary data, the data were collected through secondary means from Universiti Utara Malaysia Library data main stream. Data concerning a sample of 15 listed companies in Bursa Malaysia were generated and this was used for the study. Results The study adopted a correlation analysis technique. In particular, it used the Pearson correlation analysis technique to determine the correlation between the foreign exchange rate and companies share price of Malaysia s listed companies in Bursa Malaysia of consumer products. The implication of share price correlation with exchange rates depends on the relationship exhibiting between both. For instance, for those companies that exhibit a negative and significant correlation, it means that a depreciation in the currency exchange rate leads to a depreciation in share price. This is because when the exchange rate depreciates, it will increase the demand for foreign currency dominated in an asset, reduces the demand for local stock, hence the price of domestic share falls (Adjasi, Biekpe & Osei, 2011). From the analysis of Pearson correlation, summaries of all fifteen (15) companies are explained in table 2; the positive correlation between share prices against the exchange rate means that both variables have a direct relationship with each other. Meanwhile, the negative correlation indicates that both variables have an opposite relationship against each other. Journal of Management 22

7 Table 2: Summary of correlation analysis MYR/USD MYR/EUR MYR/JPY MYR/GBP MYR/CHF MYR/SGD MYR/CNY COMPANY monthly monthly monthly monthly monthly Monthly monthly Exposed exchange exchange exchange exchange exchange exchange exchange ra te rate rate rate rate Rate ra te AJINOMOTO pos itive pos itive Ye s BONIA nega tive pos itive pos itive Ye s CHEEWAH Positive Ye s FARMSBEST pos itive pos itive pos itive Positive Ye s HWA TAI Positive Ye s MALAYAN pos itive Ye s NESTLE pos itive Positive Ye s PADIBERAS pos itive Ye s PADINI pos itive pos itive pos itive Positive Ye s PELIKAN pos itive pos itive Ye s TAKASO pos itive pos itive pos itive Positive Ye s TGL pos itive Ye s UMW pos itive Ye s UPA pos itive Positive Ye s Y EE LE E negative Yes Company 1: Ajinomoto (Malaysia) BERHAD The company s share prices are significantly correlated with all seven currency exchange rates for all the years except for years: 2001, 2002 and The result shows that the company s share prices are highly correlated against MYR/EUR and MYR/CNY. Both currency exchange rates have a balance correlation throughout the other ten years. This means that the appreciation (depreciation) of MYR against EUR and CNY can give more impact to the share price compared to other currencies either to increase (decrease) the share prices of the company. Thus, Ajinomoto has equal exposure against seven exchange rates movements. Journal of of Management 23

8 Company 2: Bonia corporation BERHAD The company s share prices are insignificantly correlated with all seven exchange rates for the years: 2003, 2004, 2005, 2011and However, the company s share prices are highly correlated with USD, EUR and GBP throughout the remaining nine years. The result shows that the company s share prices have negative correlation against USD. This negative correlation means that the company would tend to avoid hedging against the USD since there is less economic exposure. But, the company s share price has a positive correlation against EUR and GBP. The positive correlation means that the company may want to hedge the EUR and GBP currencies as the company might have higher economic exposure higher, whereas it indicates that the company might face higher exchange rate risk. Company 3: Cheewah corporation BERHAD The company s share prices are significantly correlated with all the seven exchange rates except for year It means that share prices of the company are not exposed to exchange rate changes in The result shows that the company s share prices are highly correlated with SGD currency rate. The positive correlation of the SGD gave a positive change in years: 2000, 2003, 2005, 2009 and Company share prices also have a negative correlation during years 2002 and 2006 against all exchange rates except for USD. This negative correlation means that the company would tend to avoid hedging against the respective currencies since there is less economic exposure. Company 4: Farm s best BERHAD The company s share prices are not correlated with all seven exchange rates for the years 2002 and Besides that, the changes of the company s share prices have less relationship against the changes of exchange rate for years: 2001, 2004 and Among the seven currencies, the company s share prices are highly correlated with EUR, JPY, GBP, and SGD. The result also shows that EUR has a highly positive relationship with share prices. It means that the company has higher economic exposure when there are changes in the respective currency exchange rate. Journal of Management 24

9 Company 5: Hwa tai industries BERHAD The company s share prices are insignificantly correlated with all seven exchange rates for the year The table also shows that the company s share prices are highly correlated against the SGD exchange rate. The company s share prices have a positive correlation with SGD. It means that the changes of share prices have the same direction with changes in a respective exchange rate. Besides that, the positive correlation also indicates that the company needs to take the hedging approach against the SGD as the company might have higher economic exposure and higher exchange rate risk. Company 6: Malayan flour mills BERHAD The company s share prices are not significantly correlated in the year 2012 with all the exchange rates. Besides that, the company has less significant in the years: 2004 and 2010 compared to other years. Share prices of the company are highly correlated with the EUR exchange rate. Overall, the company share prices have positive correlation with most of the currency throughout the years. The positive correlation indicates that the share prices have a direct/positive relationship between share prices and currency exchange rates. The company would take a hedging approach as a method to avoid higher economic exposure due to the changes in exchange rate. Company 7: Nestle (Malaysia) BERHAD The company s share prices are insignificantly correlated with seven (7) exchange rates for the years: 2001 and The table also shows that less correlation incurred for the years: 2000, 2002, 2006 and Among the seven exchange rates, the company s share prices are highly correlated with SGD and CHF. However, between both currencies, SGD has higher positive correlation compared to CHF exchange rate. This means that there is less possibility for the company to hedge against SGD as it has less economic exposure compared to CHF. Journal of of Management 25

10 Company 8: Padiberas nasional BERHAD The company s share prices are significantly correlated with all seven (7) exchange rates throughout the years except for year The result also shows that company s share prices are correlated with the exchange rate. It means that any changes in the exchange rate will give an impact to the company s share price whether in the same direction or the opposite direction. Among all the currencies, CNY is most correlated positively with the company s share prices. As a result, the company has higher exposure to the economic, when there are changes in CNY. Company 9: Padini holdings BERHAD The company s share prices are insignificantly correlated with all seven (7) exchange rates for the years: 2002, 2004 and The company s share prices are highly correlated with EUR, GBP, CHF and SGD for the rest of ten (10) years. Among those four currencies, the company s share prices are positively highly correlated with GBP. The company may tend to hedge against the GBP more compared to other currency as the company has higher economic exposure and higher exchange rate risk. Company 10: Pelikan international corporation BERHAD The company s share prices are insignificantly correlated with all seven exchange rates for the years: 2001, 2003, 2007 and The result also shows that the company s share prices have highly correlation with JPY and GBP. Besides that, between both stated exchange rates, the company s share prices have more exposure to the economic risk because it has higher correlation with GBP. Company 11: Takaso resources BERHAD The company s share prices are insignificantly correlated with all seven (7) exchange rates for the years: 2001 and The table shows that the company s share prices have more negative correlation during the years: 2002 and 2004 with four (4) exchange rates Journal of Management 26

11 namely: (1) EUR, (2) JPY, (3) CHF and (4) SGD. However, between those currencies, the company s share prices have higher correlation against JPY. The positive correlation with JPY exchange rates indicates that the company s share prices have higher economic exposure compared to other currencies. Company 12: To GuanLee corporation BERHAD The company s share prices are insignificantly correlated with all seven (7) exchange rates for the years: 2004, 2010, 2011 and The correlation is constant in the year 2007 as there is no movement in the share price for this year. The company s share prices are positively related with pound sterling exchange rate. The high correlation between the company s share price and GBP exchange rate means that there is more possibility for the company to hedge against GBP as it has more economic exposure throughout the respective 10 years. Company 13: UMW holdings BERHAD The company s share prices are insignificantly correlated with all seven (7) exchange rates for the years: 2006 and Besides that, they are less significant among all the currencies with the company s share price during the years: 2004, 2007, 2011 and Among all seven exchange rate currencies, GBP is highly correlated with the company s share price. The positive correlation indicates that the exchange rate has a positive relationship with the company s share price. Any increment in the exchange rate will lead the company s share price to the additional economic risk exposure. Company 14: UPA corporation BHD The company s share prices are insignificantly correlated with all seven exchange rates for the year The company s share prices are positively correlated against EUR and SGD throughout the years except for year Having a positive correlation between the company s share price and EUR and SGD exchange rate will lead the company to more Journal of of Management 27

12 economic exposure. This means that the company would likely take the approach to hedge against the EUR and SGD in order to avoid higher economic exposure. Company 15: Yee LeeCorporation BHD The company s share prices are significantly correlated with all seven (7) exchange rates except for the year Most of the exchange rates are significantly correlated with the company s share prices. However, among all the exchange rates, USD has the most highly negative correlation with the company s share price. The result indicates that any changes in the US dollar exchange rate will give some impact against the company s share price, but it is in the opposite direction. The rest of the exchange rates that are not mentioned in any of the 15 companies have almost equal economic exposures according to the equal amount of both positive and negative correlation. However, the correlation remains constant for MYR/USD from the year 2000 until 2004, because during those years, the exchange rate for MYR/USD is fixed to MYR3.80/ USD. Narrowing down to the company s economic exposure, exchange rate movement may affect all the companies, though the amount of exposure depends on the specific exchange rate and varies over time. Over the selected time frame, most of the companies have a highly positive correlation between their share prices against exchange rates movements. Referring to Table 2, Yee Lee is the only company that has a highly negative correlation between its share prices against exchange rates movements. 5. Discussion and conclusion This study examined the correlation between foreign exchange rate exposures and share prices of Malaysia s listed companies in Bursa Malaysia by focusing only on the consumer product sector. Data were generated from fifteen companies that have been listed in the main market between periods of 31st December, 1999 and 31st December, The data were analyzed using correlation analysis technique to examine the co-efficient between (i) monthly exchange rates (ii) monthly share prices and monthly exchange rates of seven foreign currencies. Journal of Management 28

13 From the results of the correlation analysis, it was found that there is a high percentage of significance of the correlation between the share prices of all the fifteen (15) companies against the monthly exchange rates of seven (7) foreign currencies; (1) MYR/USD, (2) MYR/JPY, (3) MYR/EUR, (4) MYR/GBP, (5) MYR/CHF, (6) MYR/SGD, and (7) MYR/ CNY exchange rates. The results also revealed that foreign exchange rate is significantly and positively correlated with share prices. It further shows that foreign exchange rate movements have an effect on companies value in the form of share price. Thus, a strong positive correlation exists between foreign exchange rate and the company price share index. The finding suggests that the more the companies are exposure to high foreign exchange rate, the more they are likely to lose some of their value. It further implies that higher foreign exchange rate tends to determine the price value of the consumer products companies in Malaysia. Thus, companies should be cautious of higher foreign exchange rate in the course of doing their business. This study further found that most of the companies are significantly exposed to at least one of the foreign exchange rates, which are consistent with the study done by Bartram, (2008). In all, the result corroborates with the previous findings by Hsiao and Han, (2012), Glaum, Brunner and Himmel (2000), Fraser and Prantzalis (2004), and Rim and Mohidin (2005), who found that foreign exchange rates are strongly correlated with companies share prices. Accordingly, the results of the correlation analysis between monthly share prices of companies and monthly exchange rates revealed that all of the companies have almost equal economic exposures. Mostly, at least one of exchange rates influenced economic exposures of these fifteen (15) companies. Journal of of Management 29

14 Limitation of the study and recommendation for future study The analysis technique for this present study was purely based on the correlation analysis through the SPSS. Thus, the use of other analysis technique or methods such as meta-analysis could provide additional insight in this area of study. This method combines various findings from other studies to draw conclusion on the investigation, making it more robust than other methods. Hence, this study recommends the use of meta-analysis technique in subsequent study of this nature. Accordingly, it is suggested that future studies should include the MYR index rate particularly for consumer product industry as an additional variable. Additional, the use of regression analysis technique is also recommended in order to produce more accurate results. The variation observed among company exposure to a variety of exchange rate might probably be explained by the company size, the level of the firm s involvement in international trade, holding of foreign asset and foreign sales (Adjasi, Biekpe,& Osei, 2011). Finally, the data represented only those listed companies dealing on consumer products in Malaysia without taking into account other companies that are dealing with other products such as building materials, distributive services, etc. It is possible that there could be different patterns of relationship emerging in different company dealing with other products other than consumer products. Apart from that, the study gathered only data from 15 companies, a larger usable response says above 50 companies would have been given the power to generalize. Journal of Management 30

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