European Foreign Exchange Risk Exposure

We find that about 13% of our sample of 817 European multinational firms experienced economically significant exposure effects to the Japanese yen, 14% to the US dollar and 22% to the UK pound. Our evidence differs substantially from the US experience and is robust across sub‐sample periods, suggesting that a depreciating (appreciating) euro against foreign currencies has a net negative (positive) impact on European stock returns. Short‐term exposure seems to be relatively well hedged, where considerable evidence of long‐term exposure is found. Firms with weak liquidity positions tend to have smaller exposures. Foreign exposure is found to increase with firm size.