Resolving the Exchange Rate Puzzle

Abstract: This paper aims to contribute to the current discussion on the effects of exchange rate exposure on firm value. Particularly, it makes an attempt to resolve the exchange rate puzzle, a phenomenon based on the ambiguous results derived from existing literature. The sample group includes 66 Swiss non-financial firms, for which fundamental firm data for the last fiscal year have been obtained. The accurate data provided by these globally oriented firms in combination with the favourable event studied, the removal of the EUR currency peg on January 15th 2015, form the basis for this thesis. A multivariable regression model conducted on different time horizons finds significance in the exposure variables foreign sales, foreign assets as an approximation for foreign costs, foreign non-current assets in relation to total assets as well as foreign financial debt in relation to total assets. Besides adding to existing literature, the findings in this paper may have implications for both asset managers and risk management within firms as it could add explanatory power to asset pricing models. Lastly, central banks and government institutions may consider the findings in this paper useful in order to determine the impact that a potential foreign exchange market intervention would have.