Exchange Rate Exposure and Firm Value: Evidence from Multinational Corporations Under Floating and Pegged Regimes — The Case of Lebanon
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This study examines how exchange rate exposure relates to firm value for multinational corporations operating under floating and pegged exchange rate regimes, with particular attention to Lebanon's transition from prolonged exchange-rate stability to severe currency distress. Exchange rate risk is an important source of financial uncertainty for firms with international operations and is commonly divided into transaction, translation, and economic exposure (Adler & Dumas, 1984; Shapiro, 1975). Theoretical and empirical research suggests that exchange rate regimes can influence both the visibility and magnitude of firms' currency exposure. Lebanon provides a particularly informative setting because the Lebanese pound maintained an official exchange rate of LBP 1,507.5 per U.S. dollar for many years before the exchange-rate crisis that emerged in 2019. The subsequent depreciation and development of multiple exchange rates created a sharp contrast with the earlier period of nominal stability. The study therefore compares multinational firms exposed to the Lebanese market with firms operating primarily in floating-currency environments over the study period. Exchange rate exposure is estimated using the two-factor market model associated with Jorion (1990), in which firm returns are regressed on market returns and currency returns. Firm value is measured using Tobin's Q and the market-to-book ratio, while firm size, leverage, profitability, sector, and exchange-rate regime are included as control variables. The illustrative results indicate that firms in the pegged Lebanese environment displayed lower measured absolute exchange rate exposure during the stable period, while Lebanese-exposed firms showed substantially higher exposure following the onset of the currency crisis. The illustrative regression results also show a negative association between absolute exchange rate exposure and Tobin's Q. These patterns are consistent with the possibility that nominal exchange-rate stability can reduce measured exposure without necessarily eliminating underlying economic vulnerability. Because some firm-level Lebanese observations remain unavailable, the numerical results should be interpreted as illustrative rather than definitive until the full dataset is completed.
Keywords
Exchange Rate Exposure, Firm Value, Floating Regime, Lebanese Currency Crisis, Multinational Corporations, Pegged Regime