FIRM VALUE, REAL EXCHANGE RATE CHANGES, AND COMPETITIVENESS (EXPOSURE, INTERNATIONAL BUSINESS, FINANCE, AUTOMOBILES

The thesis investigates operating exposure, the effect of changing exchange rates on the future operating cash flows of the firm. Two aspects of the problem are emphasized: competition among firms in the determination of exposure and the transfer of value between firms as an element of this exposure. Four theoretical models of exposure are presented, each characterized by a different type of competition. These demonstrate the dependence of exposure on firms' riskiness, the form of demand and cost functions, and indirect, competitive interaction among firms. Exposures of competitors are compared to determine which elements of exposure affect competitors similarly and which differently. It is proposed that under fairly general circumstances, changes in competitiveness can be associated with disproportionate changes in firm values. This proposition is employed in an empirical methodology used to estimate operating exposures for nineteen automobile manufacturers, and to separate the competitive, intra-industry effects from the industry-wide effects of changing exchange rates. The methodology employs financial market data on exchange rates and firm values from June 1985 through January 1986. The results show significant exposures to some exchange rates. The results provide no support for the hypothesis that home currency appreciations harm the international competitiveness of home country firms. Quite the opposite seems indicated for the auto manufacturers.