Foreign Exchange Risk Management and Corporate Investment in South Korea

This study examines how the capability of foreign exchange risk management (hereafter, FXRM) affects the investment sensitivity to foreign exchange uncertainty using a large panel of publicly traded manufacturing firms in South Korea for the period 2010-2019. We find that the foreign exchange uncertainty adversely impinges on corporate investment. Notably, this adverse relationship can vary according to the FXRM capacity, which is proxied by outside directors’ financial expertise. Specifically, the effective FXRM attenuates the negative effect of the foreign exchange uncertainty on corporate investment. These empirical findings retain their validity across both static and dynamic investment frameworks.