This paper examines the effect of unexpected exchange rate movements on U.S. shareholder wealth. Empirical results based on a sample of 634 U.S. multinational firms (1) confirm previously reported evidence that the disaggregation of the worldwide trade-weighted U.S. dollar exchange rate index into seven region-specific trade-weighted indices increases the precision and significance of exposure estimates; (2) show that models assuming that changes in spot exchange rates are unanticipated are frequently misspecified and, thus, unable to correctly detect the impact of currency movements on firm value; (3) reveal that forward and survey expectations enable us to distinguish between the effect of 'realized' and 'unexpected' currency movements; and (4) reveal that investors making pricing and hedging decisions prefer to use the information contained in short-term forward and survey expectation rates to the information included in long-term forecasts.

Exchange risk exposure, Heterogeneity, Survey-based expectations, U.S. multinational firms
dx.doi.org/10.1016/j.jimonfin.2011.10.002, hdl.handle.net/1765/37937
ERIM Top-Core Articles
Journal of International Money and Finance: theoretical and empirical research in international economics and finance
Erasmus Research Institute of Management

Jongen, R, Muller, A, & Verschoor, W.F.C. (2012). Using survey data to resolve the exchange risk exposure puzzle: Evidence from U.S. multinational firms. Journal of International Money and Finance: theoretical and empirical research in international economics and finance, 31(2), 148–169. doi:10.1016/j.jimonfin.2011.10.002