Exchange Rate Volatility Exposure on Corporate Cash Flows and Stock Prices: The Case of Poland

Exchange rate volatility may influence the expected cash flows and thus the firm value; however, previous empirical work finds mixed results and rarely considers Central and Eastern European markets. To examine the economic significance of the exchange rate to firm value relation, this paper analyses the foreign exchange rate exposure on the value of publicly listed companies in Poland on the basis of stock prices and more than 6000 large, medium sized and small firms on basis of corporate cash flows. The analysis covers post-transformation period, from 2003 to 2012, respectively to 2014 in case of stock prices, using panel regression and orthogonalized exposure regressions. With Eurozone countries as one of the most important trade partners, a large number of transaction settlements are conducted in euro, therefore, the analysis focuses on the PLN/EUR exchange rate using monthly data. Results show that significant number of these firms, especially small and medium sized is exposed. The measuring of exchange rate risk and hedging is therefore crucial for reduction of the firms' uncertainty, especially in case when firms have limited access to currency derivatives.