FX Neglect in Corporate Investment
Type
working paper
Date Issued
2025
Author(s)
Abstract
I study whether ignoring predictable foreign exchange (FX) rate changes distorts multinational firms' capital allocation. Capital investment across currencies is negatively correlated with forward FX rates at the time of investment -- consistent with applying the same nominal hurdle rates to all investments without adjusting for different currencies. Firms investing in negative-expected-FX geographies exhibit lower stock market valuations. Forward FX rates at the time of historical capital investment also positively predict future stock returns. As the forward rates are known before the investment is made, the ex-ante forward rates are strong predictors of realized ex-post FX changes, and the cash flows could be hedged at these rates, these results suggest that firms neglect predictable FX changes when valuing investment projects.