THEORETICAL FRAMEWORK
Explaining the need to manage forex exposure with the underinvestment theory, Froot
et al. (1993) argue that with uncertain future cash flows, firms are bound to forego viable
projects in anticipation of difficulties in committing to the projects’ financing needs.
Abandoning the project is an option of last resort because it forfeits firms’ investment
and damages their reputation and credibility. Since firm value is the present value of all
future cash flows, forex exposure ultimately poses a threat to the firm’s value (Luo and
Wang, 2018). Therefore, companies need to engage in mitigating strategies to manage
forex exposure risk effectively. Explaining the need to manage forex exposure with the
underinvestment theory, Froot et al. (1993) argue that with uncertain future cash flows,
firms are bound to forego viable projects in anticipation of difficulties in committing to the
projects’ financing needs. Abandoning the project is an option of last resort because it
forfeits firms’ investment and damages their reputation and credibility. Since firm value
is the present value of all future cash flows, forex exposure ultimately poses a threat to
the firm’s value (Luo and Wang, 2018). Therefore, companies need to engage in
mitigating strategies to manage forex exposure risk effectively. Explaining the need to
manage forex exposure with the underinvestment theory, Froot et al. (1993) argue that
with uncertain future cash flows, firms are bound to forego viable projects in anticipation
of difficulties in committing to the projects’ financing needs. Abandoning the project is an
option of last resort because it forfeits firms’ investment and damages their reputation
and credibility. Since firm value is the present value of all future cash flows, forex
exposure ultimately poses a threat to the firm’s value (Luo and Wang, 2018). Therefore,
companies need to engage in mitigating strategies to manage forex exposure risk
effectively.
CONCEPTUAL FRAMEWORK