The exchange rate exposure to Malaysian nonfinancial firms / Hanisah Miskam

Financial theory predicts that a change in an exchange rate should affect the value of a firm or an industry. There are numerous studies which provide evidence for a relationship between foreign exchange movements and changes in firm values. This study will seek to estimate the sensitivity of Malaysian nonfinancial companies at the industry level over the period 2000-2006. It will focus on three selected industries which are construction, consumer products and hotel.

DESIGN/ APPROACH/ METHODOLOGY
In this study exchange rate exposure is defined as the changes in value of the firm or industry due to changes in exchange rates. The relationship between stock returns of the firms and exchange rate changes will be determined. The approach will employ Multiple Linear Regression model to estimate exchange rate exposure of 64 Malaysian nonfinancial companies over the period 2000-2006. The real exchange rate of the RM against the US dollar will be used as independent variable to be regressed with stock price as a proxy variable to firms' stock returns. The market variable, KLCI Index is intended to capture the time serial influence of the general market on individual stock returns. All data will be collected from the Datastream Database and annual reports.

FINDINGS
The findings indicate that the weak relationship between stock return and foreign exchange rate exposure shows the increase or decrease of the firms' value in Malaysia can not be wholly explained by the exchange rate changes. Malaysian nonfinancial firms are negatively affected to an appreciation (depreciation) of RM against the US dollar, indicating that higher (lower) returns are associated with depreciation (appreciation) of the RM. Only the construction industry is significantly significant exchange rate exposure at the ten per cent level.
RESEARCH LIMITATIONS/IMPLICATIONS
Future research in the area should consider additional factors that might affect a firm's and an industry's exposure to exchange rate changes.

PRACTICAL IMPLICATIONS
The findings of the study have interesting implications for public policy makers who wish to understand links between policies that affect exchange rates and relative wealth affects. These findings should also be of particular importance to investors who under or overweight large multinational corporations.

ORIGINALITY/VALUE
The study extends previous research on foreign exchange rate exposure of nonfinancial companies making Malaysia as a base country.