The existing literature reports insignificant `total' exposure for multinational or exporting firms, where total exposure incorporates both firm-specific and macroeconomic effects. We propose a dual-effect hypothesis to explain this result which seemingly contradicts conventional wisdom. According to our proposed hypothesis, firms are affected by both the domestic economy and foreign markets. These effects are at least partially offsetting for exporters and additive for importers. The resulting predictions of insignificant total exposure for exporters and positive total exposure for importers are borne out in our tests. The literature also reports insignificant `residual' exposure for multinationals or exporting firms, where residual exposure estimates the firm-specific exposure. This result is explained by biases in the residual exposure estimates introduced by the choice of the value-weighted market index as the control portfolio. We propose an equally-weighted portfolio of purely domestic firms as an alternative portfolio to reduce such biases and report significantly negative exposure for exporters and significantly positive exposure for importers, as predicted by theory.

Empirical studies on whether investments are sensitive to cash flows in imperfect markets often report conflicting results and have been criticized on conceptual and methodological grounds. Our study mitigates some of these problems using a research design that relates changes in investment–cash flow sensitivity to changes in the bid-ask spread measure of information asymmetry surrounding (i) implementation of the Sarbanes-Oxley (SOX) Act and (ii) deregulation of firms in the Transportation, Telecommunication, and Petroleum and Natural Gas industries. Consistent with our hypotheses, we find that information asymmetry decreases following SOX and that there is a corresponding decrease in the investment–cash flow sensitivity, pre- to post-SOX. Further, greater decreases in information asymmetry following SOX are associated with greater decreases in investment–cash flow sensitivity. The results for the deregulation sample are also consistent with our hypothesis, wherein we observe an increase in information asymmetry and corresponding increase in the investment–cash flow sensitivity following deregulation.