Foreign exchange exposure, competition and the market value of domestic corporations of UAE

Foreign exchange exposure, competition and the market value of domestic corporations of UAE

The purpose of this study is to examine the foreign exchange exposure of domestic corporations in the United Arab Emirates (UAE) and the implications of that exposure on the market value of those corporations considering the effect of competition as a determinant of exchange rate exposure over the period January 2005 to December 2011 for 49 firms. It was found that in many cases domestic firms are likely to experience exposure to foreign exchange rate. The analysis indicates that UAE’s domestic firms, on average, experience negatively significant exposure to the Euro (EUR), British pound (GBP), Australian dollar (AUD), Indian rupee (INR) and equally weighted (EQW) exchange rate and positively significant exposure to the Japanese yen (JPY). The negative exposure indicates that UAE domestic firms experience cost exposure to a depreciation of the currencies GBP, EUR, AUD, INR, and EQW, and this leads to reduced profitability and increased cost of production for domestic firms. An alternative explanation is that UAE domestic firms are under pressure of competition with companies and products originating from destination countries with of these currencies. More interestingly, domestic firms with high debt ratio, market-to-book ratio and low exposure with asset turnover are more likely to have greater exposure to foreign exchange rates. This study also measured the log of equity market value as a measure of size, Herfindahl and PCM as proxy of competition.