The Impact of Currency Risk on U.S. MNCs: New Evidence from Returns and Cross-Border Investment around Currency Crises

This paper provides evidence on the valuation implications of currency risk. We analyze whether increases in currency risk for US MNCs following shifts from fixed to floating currency regimes in 23 countries led to increases in currency exposure and changes in cross-border investment decisions. To identify the effects, we use a difference-in-differences design that exploits the larger change in risk for currencies tied to the dollar during the fixed regime than for non-dollar-linked currencies. We conclude that the net exposure to currency risk is significant for U.S. MNCs. However, factors other than currency risk such as strategic considerations are of first-order importance for firms' cross-border investment decisions.