Impacts of corporate governance on the firm's foreign exchange exposure in emerging markets

Purpose This study examines the relationship between corporate governance mechanisms and firms' sensitivity to exchange rate fluctuations. The primary purpose is to identify how specific board attributes and ownership structures can mitigate or exacerbate this key macro-financial risk for internationally active firms. Design/methodology/approach Using a comprehensive panel dataset of publicly listed and over-the-counter (OTC) companies in Taiwan from 2006 to 2024, we employ Feasible Generalized Least Squares regression models to capture the longitudinal relationship between governance variables (including board size, board ownership, and controlling shareholder ownership) and foreign exchange exposure. To address potential endogeneity concerns, we implement an Instrumental Variable approach using leave-one-out industry-year averages. Furthermore, we utilize one-year lagged governance variables to confirm the robustness of our baseline estimations. Findings We find that firms with larger boards are more exposed to currency risk, consistent with the hypothesis that coordination inefficiencies can impede timely risk-management decisions. In contrast, greater ownership concentration by board members and controlling shareholders significantly reduces exchange rate exposure, suggesting that enhanced managerial accountability improves risk oversight. Originality/value This paper contributes to the literature by providing a long-panel analysis of the governance-risk nexus in an emerging market context. The findings offer valuable insights for executives and board members, highlighting the strategic value of tailoring governance structures to a firm's international business scope and sectoral characteristics. The study underscores the critical role of governance design in navigating external macro-financial risks and mitigating corporate vulnerability to exchange rate volatility.