MF 33,9 620 Managerial Finance Vol. 33 No. 9, 2007 pp. 620-641 # Emerald Group Publishing Limited 0307-4358 DOI 10.1108/03074350710776217 The exchange rate exposure of UK non-financial companies Ahmed El-Masry Plymouth Business School, Plymouth, UK Omneya Abdel-Salam Aston Business School, Birmingham, UK, and Amr Alatraby Ain Shams University, Cairo, Egypt Abstract Purpose – The purpose of this paper is to investigate the exchange rate exposure of UK non- financial companies from January 1981 to December 2001. Design/methodology/approach – The study employs different exchange rate measures and adopts an equally weighted exchange rate. The analyses are conducted at the firm level. All analyses are conducted by regressing the firm’s exchange rate exposure coefficients on its size, foreign activity variables and financial hedging proxies over the whole sample period. Findings – The findings show that a higher percentage of UK non-financial companies are exposed to exchange rate changes than those reported in previous studies. Generally, the results provide a stronger support for the suggested equally weighted rate as an economic variable, which affects firms’ stock returns. The results also show a high proportion of positive exposure coefficients among firms with significant exchange rate exposure, indicating a higher proportion of firms benefiting from an appreciation of the pound. Finally, the results also indicate evidence that firms’ foreign operations and hedging variables affect their sensitivity to exchange rate exposure. Practical implications – This study provides important implications for public policymakers who wish to understand links between policies that affect exchange rates and relative wealth effects. Originality/value – The empirical results of this study should help investors to examine how common stock returns react to exchange rate fluctuations when making financial decisions, and prove useful for financial managers when measuring exposure to foreign exchange rate changes. Keywords Exchange rates, Exchange rate mechanisms, Companies, Value analysis Paper type Research paper I. Introduction The increasing economic integration and development of global markets means that few companies, if any, are unaffected by currency movements (Bradley and Moles, 2002). Change in a company’s earnings due to unexpected changes in foreign currency exchange rates relative to their domestic currency is known as foreign exchange rate risks (Jacque, 1996). Exchange rate changes may affect firms’ profitability and value. Exchange rate changes can also impact the level of competitiveness of firms that are exposed to exchange rate risk, or affect the value of net assets denominated in foreign currencies. Although foreign exchange risk is one of the many business risks faced by modern corporations, it has not been subject of much empirical research, even though exchange rates are several times more volatile than inflation or interest rates (Jorion, 1990). More puzzling is that the fundamental question regarding the impact of foreign exchange rate movements and contemporaneous changes in firm value remains unanswered (Faff and Marshall, 2002). As Jorion (1990) points out, the sources of The current issue and full text archive of this journal is available at www.emeraldinsight.com/0307-4358.htm Omneya Abdel-Salam is currently the Visiting Associate Professor in Accounting at the School of Management, AUS, UAE.