The Asian exposure of U.S. Firms: risk management and operating strategies

Abstract

This paper examines the operational content of the Asian exchange exposure of US firms. We find that contemporaneous and lagged changes in real exchange rates have significant impact on firm value for about 30% of the U.S. firms with Asian operations. The effects of a strong dollar are heterogeneous, with both significantly positive and significantly negative coefficients. The exchange exposure coefficients are then estimated as a function of international operation and risk management variables. A strong dollar has an adverse effect on firm value when the firm has a negative initial exposure position, and is related to exports and local sales activities of the firms. However, asset deployment in Asia raises the exposure in absolute terms regardless of initial exposure condition. Variables for hedging incentives explain exposure in both positive and negative exposure groups. Finally, a disaggregate study by country shows significant intra-region differences, indicating the different ways in which the U.S. firms used their Asian subsidiaries operationally.