The Nature and Determinants of the Economic Currency Exposure of Non-Financial UK Firms

Abstract

This study examines the sensitivity of sales, profit margins and input costs to exchange rate movements for non-financial, UK firms. The sample is a representative cross-section of larger, publicly-listed firms and is not limited to those directly involved in international trade. Surveyed firms provided data on both the direct and indirect components of economic exposure. As with other studies, we find a statistically significant relationship between a firm's exchange rate sensitivity and the degree to which it sells, sources, or funds itself internationally. Contrary to the theory on economic exposure, only one indirect detreminant, that for foreign-based competition, is unambiguously significant. The other indirect effects, the degree of production differentiation, the demand elasticity for a firm's output and common input currencies for competitors, are not significant in our models. Our examination of the interactive effects suggested by the theory of economic exposure shows no statistical relationship to firm's exchange rate sensitivity. We attribute the weak evidence for competitive effects to the complexities of the indirect determinants of economic exposure at the form-specific level.