Research On The Sensitivity Of Enterprise Value To Exchange Rate Fluctuations

In recent years, China has become more closely associated with the global economy and the foreign direct investments made by Chinese enterprises have been constantly expanded in both regional coverage and scale. Following economic globalization and the increasingly volatile RMB exchange rate fluctuations after the exchange rate system reform in 2005, however, Chinese enterprises investing abroad which serve as the main participants in foreign direct investment have to take greater and greater risks of exchange rate fluctuations. Therefore, it is necessary to make an in-depth study of the sensitivity of the value of enterprises investing abroad to exchange rate fluctuations.The research contents of this paper are mainly divided into three parts, namely research basis and theoretical analysis, overall measurement of sensitivity, and statistical analysis of factors influencing sensitivity. First of all, the enterprise value theory and the exchange rate theory are integrated, and the impact of exchange rate fluctuations on the value of Chinese enterprises investing abroad as well as the factors influencing enterprises’foreign exchange risk exposure are analyzed from a theoretical perspective. Secondly, with the 18 Chinese listed enterprises investing abroad which have large assets abroad, large stock of investments abroad and large sales revenue abroad being research samples, and according to the RMB real effective exchange rate index and the fluctuations of U.S. dollar, Euro and Japanese yen-the three foreign currencies most frequently used by enterprises for investing abroad-against RMB exchange rates, the extended Jorion model that takes into account the autocorrelation of stock yield and the lag effect of exchange rate fluctuations is utilized to measure the sensitivity of the value of enterprises investing abroad to the fluctuations of REER and multilateral fluctuations of exchange rate. Thirdly, the method of dynamic comparative analysis is adopted to discuss how international financial crisis and factors adjusting exchange rate system influence enterprise’s foreign exchange risk exposure level. At last, with the financial statement data of the 13 enterprises investing abroad during 2010 and 2014 collected, the method of static comparative analysis and the correlation coefficient method are adopted to further dissect the influence of enterprise characteristics on risk exposure, analyze the empirical results and put forward countermeasures and suggestions for enterprises investing abroad to avoid the risk of exchange rate fluctuations.The research conclusions of this paper are as follows. Firstly, exchange rate fluctuations have an important influence on the value of Chinese enterprises investing abroad, and the RMB exchange rate fluctuations against different foreign currencies influence enterprise value to different degrees and most enterprises suffer damage because of RMB appreciation. Secondly, international financial crisis does not significantly increase the foreign exchange risk exposure level of Chinese enterprises investing abroad, which is the result of China adjusting exchange rate system after the outburst of the financial crisis. Finally, enterprise characteristics (financial indexes and the use of foreign exchange derivatives) have a significant impact on the foreign exchange risk exposure level of Chinese enterprises investing abroad. Enterprises which use foreign exchange derivatives for hedging have obviously lower exposure to foreign exchange risk than those which do not use foreign exchange derivatives; the value of enterprises with a higher proportion of income from abroad is more sensitive to exchange rate fluctuations; the value of enterprises with a larger quick ratio is more sensitive to exchange rate fluctuations; the value of enterprises with a higher long-term liability rate is less sensitive to exchange rate fluctuations; the value of enterprises with a larger scale is more sensitive to exchange rate fluctuations. In the end, the corresponding countermeasures and suggestions are proposed according to the above empirical results.