Title: Influence of financial distress on exchange rate exposure: evidence from India

Authors: Krishna Prasad; K.R. Suprabha; Shridev Devji

Addresses: Justice K S Hegde Institute of Management, NMAMIT, Nitte – 574110, Karnataka, India ' National Institute of Technology, NH 66, Srinivas Nagar, Surathkal, Mangaluru – 575025, Karnataka, India ' National Institute of Technology, NH 66, Srinivas Nagar, Surathkal, Mangaluru – 575025, Karnataka, India

Abstract: This paper investigates the relationship between exchange rate exposure and level of financial distress. We argue that the exchange rate movements have a higher effect on the value of the firms with higher level of financial distress. The effect of other firm level variables such as profitability, size of the firm, foreign sales and expenses and liquidity on exchange rate exposure were also studied. We use Merton's (1974) structural default model to estimate firms' distance to default as a proxy for their probability of financial distress. A sample 387 firms listed in National Stock Exchange (NSE) is studied for a period of 2012-2016. We find that the level of firms' exchange rate exposure is significantly positively related to distance to default, indicating that firms that have a greater probability of financial distress are more affected by exchange rate movements.

Keywords: exchange rate exposure; financial distress; distance to default; Merton's model; India.

DOI: 10.1504/AAJFA.2018.095239

Afro-Asian Journal of Finance and Accounting, 2018 Vol.8 No.4, pp.389 - 403

Received: 04 Feb 2017
Accepted: 14 Nov 2017
Published online: 02 Oct 2018 *

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