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The Review of Corporate Finance Studies Vol. 12 No. 3 2023

How Do Investors and Firms React to a Large, Unexpected Currency Appreciation Shock?

Matthias Efing1; Rüdiger Fahlenbrach2; Christoph Herpfer3; Philipp Krueger4

1 HEC Paris , France · 2 Ecole Polytechnique Fédérale de Lausanne, Swiss Finance Institute, and ECGI , Switzerland · 3 Goizueta Business School, Emory University , USA · 4 University of Geneva, Swiss Finance Institute, and ECGI , Switzerland

open access

Abstract

Past research has suggested that firms can significantly reduce their exposure to moderate exchange rate fluctuations by means of pass-through and hedging. Studying the appreciation of the Swiss franc by 17% on January 15, 2015, we show that firms remain exposed to extreme currency events. Pass-through, a way to share the costs of exchange rate risk with foreign customers, fails after extreme exchange rate shocks, particularly in competitive industries. Firms’ exposure to currency tail risk has real consequences for their investment. The decrease in investment is explained by a reduction in profitable investment opportunities and not by financial constraints.

DOI
10.1093/rcfs/cfac024
Volume
12
Issue
3
Pages
488-538
Language
en
Sources
crossref bibtex:phds-export.bib openalex

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