Exchange rate exposure and competition: evidence from the automotive industry

This study examines the effect of real exchange rare changes on multinational firms and incorporates the effect of intra-industry competition on the relation between exchange rates and firm value. To test the relation more effectively, tests are conducted using a sample of automotive firms from the United States and Japan. Consistent with theoretical predictions, there is significant exposure to exchange rate shocks. Moreover, there is evidence of time-variation in exchange rate exposure, which is consistent with changes in the competitive environment within the industry. Finally, evidence is presented that is consistent with foreign sales being a major determinant of exposure and the effectiveness of operational hedging through foreign production. (C) 2001 Elsevier Science S.A. All rights reserved. JEL classification. F31: G30: G39.