This study examines the sensitivity of detected exchange rate exposures at the firm specific level to changes in methodological choices using a traditional two factor stock market approach for exposure quantification. We primarily focus on two methodological choices: the choice of market index and the choice of observation frequency. We investigate to which extent the detected exchange rate exposures for a given firm can be confirmed when the choice of market index and/or the choice of observation frequency are changed. Applying our sensitivity analysis to Scandinavian non-financial firms, we find aggregate results that are in line with previous studies for small, open economies. However, our main contribution to the existing literature is on the firm specific level where we find a very high defection rate when trying to confirm results from one methodological approach to another. More specifically we find that only one of five detected exchange rate exposures is confirmed when we move from an approach using weekly data to an approach using monthly data. This result is surprising since 1) the aggregate result shows that the number of detected exposures using monthly data is approximately two thirds of the number of detected exposures using weekly data and 2) there is no economic rationale that the detected exposures at the firm-specific level should change when going from the use of weekly data to the use of monthly data. In relation to a change in the choice of market index, we find that one of two detected exposures is confirmed by all variations of market indexes applied. Although the choice of market index involves a high defection rate this is at least partly in accordance with economic rationale since we are dealing with extra-market exchange rate exposures. The results of the study are important because corporate managers, stock analysts and stock pickers are primarily interested in the sensitivity - and thus reliability - of detected exchange rate exposures for a specific firm rather than for an industry or a country as a whole.
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Sixteenth Annual Conference of the Multinational Finance Society, 2009