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Business & Finance Series: Research Spotlight

Brexit referendum led to increased exposure for British firms, study finds

New research assesses the impact of the Brexit referendum on the exchange rate exposure of British, German and Spanish firms. And with Brexit soon to be a reality rather than a concept, academics warn companies to ignore the findings at their own risk

by Chris Lines (Senior Communications Officer)

Academics from three universities have studied the impact of the United Kingdom's June 2016 Brexit referendum on the foreign exchange (FX) exposures of British, German and Spanish multinational companies.

The key finding of the study, published in the International Review of Financial Analysis, is that exchange rate exposure did increase for British firms after the referendum.

Researchers from Hull University Business School, City, University of London, and the Central University of Finance and Economics in China analysed the UK’s referendum on withdrawal from European Union membership to see how it affected multinationals in the three separate nations.

Foreign exchange exposure measures the sensitivity of a firm’s value on the changes of foreign currency. For this study, the academics were interested in the bilateral exchange rate between pound sterling (GBP) and euros (EUR).

Foreign exchange exposure is important because exchange rate fluctuations have significant direct and indirect effects on firms’ profitability, value and even on their very existence. They affect not only exporting firms but also firms operating exclusively in their home country.

FX exposure after the referendum was most severe for the British firms, at the market level as well. Therefore, the Brexit vote must be seen as a warning signal to UK firms to use more currency derivatives and other methods to hedge currency exposures emanating from the Brexit referendum.

However, the analysis suggests that the vote is a nebulous event that affects German firms as well, implying that other countries should not underestimate the impact of Brexit.

After Brexit, the number of German firms with asymmetric FX exposures to the GBP/EUR rate will increase.

Asymmetric FX exposure is the sensitivity of a firm’s value on the appreciations or depreciations of the foreign currency; in this case on the bilateral exchange rate between GBP and EUR.

This finding is attributed either to the market exit costs that German firms would have to incur to leave the UK, or to the possibility that managers of German firms alter the timing and size of financial hedges to fit their market views.

Dr Thanos Andrikopoulos, Lecturer in Finance at Hull University Business School, said: "The results suggest that, after Brexit, the number of German firms with asymmetric FX exposures will increase.

“If the German firms ignore this finding, mistakes are more likely to happen.

“We are all much better off if we can understand a seemingly innocent – but in reality very complex – phenomenon such as exchange rate exposure and connect it with political events such the Brexit referendum or the actual Brexit,” he said.

Dr Xeni Dassiou [pictured], Reader in Economics at City, University of London, said: “The results are based on the June 2016 referendum to withdraw from European Union membership known as ‘Brexit’ and not on the actual Brexit that will take place (after a transition period) at the end of 2020.

“However, if the referendum had these negative effects we can only expect worse from the actual Brexit per se.”

Dr Min Zheng, Associate Professor in Finance at Central University of Finance and Economics in China, said: “The market level exposure to GBP/EUR for UK firms, as measured using the FTSE index, changed from positive to negative highlighting the importance of the referendum for the entire British stock market.”


Read the full paper: ‘Exchange-rate exposure and Brexit: The case of FTSE, DAX and IBEX’ in the Volume 68 March 2020 edition of the International Review of Financial Analysis.


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