Exchange Rate Volatility and Corporate Financial Stability in Eurozone vs. Non-Eurozone Firms

The objective of this study was to explore the impact of exchange rate volatility on corporate financial stability in European corporations, with particular emphasis on the Eurozone and non-Eurozone. The data set of this study consisted of 80 publicly listed non-financial corporations in eight European countries over the period of 2010–2024. The model was able to capture the impact of various macroeconomic changes that affected European corporations in the past few years. The macroeconomic changes that were captured in this study were the European sovereign debt crisis, the COVID-19 pandemic in the world, and the conflict in Ukraine. The financial stability was measured by the Altman Z-score, the leverage ratio, and the current ratio. In this study, the financial impact of the exchange rate was measured by the rolling standard deviations and the conditional volatility with the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models. The fixed effects model estimation with the System Generalized Method of Moments (GMM) was used in this study. The results of this study showed that the exchange rate volatility was negatively correlated with financial stability in terms of the leverage ratio. However, the Eurozone provides protection against the financial impact of the exchange rate volatility in terms of the leverage ratio. The diagnostic tests in this study were carried out with the Hansen Test and the Arellano-Bond Test. The diagnostic tests confirmed that the results were valid. The significance of this study was that it provided longitudinal data on the impact of the exchange rate on the financial stability of European corporations with particular emphasis on the Eurozone and non-Eurozone. The study also provided new insights on the exchange rate in corporate finance. The Eurozone provides protection against the financial impact of the exchange rate.