Managerial Financial Background And Firms' Exposure To The Exchange Rate Risk

The impact of exchange rate fluctuation on routine business activities,investment decisions and financial statement translation of firms have always been concerns of enterprise management and academic research.Since the RMB exchange rate almost has been keeping appreciating after exchange rate reformation,and exchange rate fluctuations have had a significant impact on corporate operation,therefore many firms begin to manage exchange rate risk exposure to corporation operation by financial hedging or operational hedging strategies.Upper Echelon Theory suggests that executives'background will significantly change their cognitive basis and values,and affect company's strategic decision-making ultimately.As the decision makers of risk management strategies and executive decision makers,executives' background characteristics may also influence the exchange rate risk management of firms.This paper attempts to analyze the relationship between the exchange rate risk and executives'background characteristics in theoretical and empirical evidence.Through reviewing the relevant studies of exchange rate risk,this paper starts by dividing exchange rate risk into economic risk and financial risk.And then based on non-financial listed companies' data and the RMB real effective exchange rate index in China from year 2007 to year 2014,we finds that firstly,financial background executives can alleviate the financial risk of the exchange rate significantly through its resource acquisition and professional ability,but has no effect on economic risk.Since strong consciousness of risk aversion would make financial background managers pay more attention to short-term performance associated with financial risk,and ignore the economic risk associated with long-term firm value.Besides,financial background managers can help the firm get more credit funds and promote firms' professional abilities of managing the exchange rate risk.Secondly,equity incentive still can't drive financial background executives to alleviate economic risk,since equity incentive is not enough to motivate financial background executives to reduce the economic risk because of very strong consciousness of risk aversion.Thirdly,salary incentive can drive financial background executives to alleviate the financial risk more significantly,since the short-term compensation will strengthen consciousness of risk aversion of financial background executives further,encouraging them to pay more attention to financial risks associated with short-term performance.Fourthly,financial background executives can alleviate the financial risk more significantly in non-state enterprises,because the reliance of executives' salary to profits is stronger in non-state enterprises.And financial background executives can help the non-state-owned enterprises to improve exchange rate risk management abilities,because non-state-owned enterprises often face financing constraints and stronger market competition.Finally,financial background executives'compensation will be improved due to lower financial risk of the exchange rate,this suggests that executives can get good economic consequences from lower exchange rate risk.As a whole,this paper enriches literatures related to managerial background characteristics and exchange rate risk,and provides guidance for firms' risk management practice.