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Foreign exchange exposure of Indonesian listed firms

Foreign exchange exposure or exchange rate exposure is the risk that a firm’s cash flows and earnings may be affected by exchange rate movements. For multinationals that have several subsidiaries overseas, exchange rate movements may have an adverse effect on a huge number of contractual transaction...

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Main Authors:	Mohamad, Azhar, Anisak, Nurul
Format:	Article
Language:	English English English
Published:	Sage Publishing 2019
Subjects:	HG3810 Foreign exchange
Online Access:	http://irep.iium.edu.my/73401/7/73401_Foreign%20Exchange%20Exposure%20of%20Indonesian%20Listed%20Firms_Scopus.pdf http://irep.iium.edu.my/73401/12/73401_Foreign%20exchange%20exposure%20of%20Indonesian%20listed%20firms.pdf http://irep.iium.edu.my/73401/13/73401_Foreign%20exchange%20exposure%20of%20Indonesian%20listed%20firms_WoS.pdf http://irep.iium.edu.my/73401/ https://journals.sagepub.com/doi/abs/10.1177/0972150919843371?journalCode=gbra
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spelling	my.iium.irep.734012021-01-25T00:33:59Z http://irep.iium.edu.my/73401/ Foreign exchange exposure of Indonesian listed firms Mohamad, Azhar Anisak, Nurul HG3810 Foreign exchange Foreign exchange exposure or exchange rate exposure is the risk that a firm’s cash flows and earnings may be affected by exchange rate movements. For multinationals that have several subsidiaries overseas, exchange rate movements may have an adverse effect on a huge number of contractual transactions. The exchange rate movements may have an impact on future cash flows, generated by the firm’s production and marketing operations. For example, a rising Indonesian rupiah may result in Indonesian goods becoming more expensive, leading to Indonesian exporters selling less in the future, resulting in unfavourable future cash flows. Lower future cash flows mean the firm’s stock valuation may decline and investors may not be attracted to investing in the firm’s stock. In this paper, we examine the effect of exchange rate movements on Indonesian listed firms’ stock prices using a multivariate model with six bilateral exchange rates. We further add a generalized autoregressive conditional heteroskedasticity (GARCH (1,1)) model for each of 100 Indonesian listed firms’ monthly closing prices from the period of January 1994 through to November 2015, and the GARCH (1,1) results are summarized and presented in Tables 1–4, 7 and 8. We find a total of 80 per cent of our sample firms to have significant exchange rate exposure. The overall results show that most of the Indonesian listed firms under study are exposed to Japanese yen, Great Britain pound and Malaysian ringgit. We posit that this sensitivity of their stock prices may be due to the fact that most of these Indonesian firms are net importers. Interestingly, the agricultural sector comes out as the most stable sector, having the least exposure and exhibiting stable performance during the Asian financial crisis of 1997/1998. For overall exchange rate exposure across all firms, we run a pooled generalized least squares model. We find that the exchange rate exposure of the Indonesian sample firms is time-variant, or in other words, very much dependent on the subperiods (before crisis, during crisis and after crisis) under study. Sage Publishing 2019-04-23 Article PeerReviewed application/pdf en http://irep.iium.edu.my/73401/7/73401_Foreign%20Exchange%20Exposure%20of%20Indonesian%20Listed%20Firms_Scopus.pdf application/pdf en http://irep.iium.edu.my/73401/12/73401_Foreign%20exchange%20exposure%20of%20Indonesian%20listed%20firms.pdf application/pdf en http://irep.iium.edu.my/73401/13/73401_Foreign%20exchange%20exposure%20of%20Indonesian%20listed%20firms_WoS.pdf Mohamad, Azhar and Anisak, Nurul (2019) Foreign exchange exposure of Indonesian listed firms. Foreign Exchange Exposure of Indonesian Listed Firms, 20 (3). pp. 1-19. ISSN 09721509 E-ISSN 09730664 https://journals.sagepub.com/doi/abs/10.1177/0972150919843371?journalCode=gbra 10.1177/0972150919843371
institution	Universiti Islam Antarabangsa Malaysia
building	IIUM Library
collection	Institutional Repository
continent	Asia
country	Malaysia
content_provider	International Islamic University Malaysia
content_source	IIUM Repository (IREP)
url_provider	http://irep.iium.edu.my/
language	English English English
topic	HG3810 Foreign exchange
spellingShingle	HG3810 Foreign exchange Mohamad, Azhar Anisak, Nurul Foreign exchange exposure of Indonesian listed firms
description	Foreign exchange exposure or exchange rate exposure is the risk that a firm’s cash flows and earnings may be affected by exchange rate movements. For multinationals that have several subsidiaries overseas, exchange rate movements may have an adverse effect on a huge number of contractual transactions. The exchange rate movements may have an impact on future cash flows, generated by the firm’s production and marketing operations. For example, a rising Indonesian rupiah may result in Indonesian goods becoming more expensive, leading to Indonesian exporters selling less in the future, resulting in unfavourable future cash flows. Lower future cash flows mean the firm’s stock valuation may decline and investors may not be attracted to investing in the firm’s stock. In this paper, we examine the effect of exchange rate movements on Indonesian listed firms’ stock prices using a multivariate model with six bilateral exchange rates. We further add a generalized autoregressive conditional heteroskedasticity (GARCH (1,1)) model for each of 100 Indonesian listed firms’ monthly closing prices from the period of January 1994 through to November 2015, and the GARCH (1,1) results are summarized and presented in Tables 1–4, 7 and 8. We find a total of 80 per cent of our sample firms to have significant exchange rate exposure. The overall results show that most of the Indonesian listed firms under study are exposed to Japanese yen, Great Britain pound and Malaysian ringgit. We posit that this sensitivity of their stock prices may be due to the fact that most of these Indonesian firms are net importers. Interestingly, the agricultural sector comes out as the most stable sector, having the least exposure and exhibiting stable performance during the Asian financial crisis of 1997/1998. For overall exchange rate exposure across all firms, we run a pooled generalized least squares model. We find that the exchange rate exposure of the Indonesian sample firms is time-variant, or in other words, very much dependent on the subperiods (before crisis, during crisis and after crisis) under study.
format	Article
author	Mohamad, Azhar Anisak, Nurul
author_facet	Mohamad, Azhar Anisak, Nurul
author_sort	Mohamad, Azhar
title	Foreign exchange exposure of Indonesian listed firms
title_short	Foreign exchange exposure of Indonesian listed firms
title_full	Foreign exchange exposure of Indonesian listed firms
title_fullStr	Foreign exchange exposure of Indonesian listed firms
title_full_unstemmed	Foreign exchange exposure of Indonesian listed firms
title_sort	foreign exchange exposure of indonesian listed firms
publisher	Sage Publishing
publishDate	2019
url	http://irep.iium.edu.my/73401/7/73401_Foreign%20Exchange%20Exposure%20of%20Indonesian%20Listed%20Firms_Scopus.pdf http://irep.iium.edu.my/73401/12/73401_Foreign%20exchange%20exposure%20of%20Indonesian%20listed%20firms.pdf http://irep.iium.edu.my/73401/13/73401_Foreign%20exchange%20exposure%20of%20Indonesian%20listed%20firms_WoS.pdf http://irep.iium.edu.my/73401/ https://journals.sagepub.com/doi/abs/10.1177/0972150919843371?journalCode=gbra
_version_	1690370703357902848
score	13.211869

Foreign exchange exposure of Indonesian listed firms

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