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the e!ects these deviations have on "rm value. It may bepossible to improve on existing results by conducting tests for these e!ects onspeci"c industries and exchange rates. Tests of a speci"c industry should allowfor clearer analyses of the role of exchange rates on the value of the multinational"rm or global competitor and the impact of industry structure on
exchange rate exposure.This study investigates the e!ect of real exchange rate changes on the value of"rms in the automotive industry, taking into account the e!ect of industrystructure and competition on the relation between exchange rates and "rmvalue. Consistent with Marston (1996), this paper argues that the exchange rateexposure of a "rm is a function of its net foreign revenues, the elasticity of
demand of the products made by the "rm and its competitors in foreign and
domestic markets, and the location of its production. The assumption is thata "rm facing high levels of foreign competition will also face high demandelasticity. Therefore, a useful test for the existence of exchange rate exposurewould employ a sample of "rms that both have high levels of foreign sales andface foreign competition. This sample should also provide for direct comparisonsbetween "rms.
The study documents signi"cant exchange rate exposure for automotive "rms
from the United States and Japan from 1973 to 1995. An analysis of the
determinants of a "rm's exchange rate exposure is done by examining the
market share of the "rms in the U.S., Japan, and Germany to analyze the impactof foreign sales on exposure. This exercise is consistent with the idea thatthe currency exposure of a "rm is a function of the export sales achieved and thecompetition encountered in a particular market. The results show thatthe exposure of U.S. "rms to the yen and Japanese "rms to the dollar are due tothe Japanese sales in the U.S. market.

2 The impact of foreign sales ratio is argued in Shapiro (1975), and empirical results of this
argument is presented in Jorion (1990) and Bodnar and Gentry (1993).
Exchange rate exposure in the automotive industry changes through time,
mostly because of the changing structure of the industry over the sample period.
The changes in dollar-to-yen exposures are strong for both U.S. and Japanese
"rms. The "ndings for the Japanese "rms are consistent with the "ndings of He
and Ng (1998) for Japanese "rms in the transport sector. Perhaps surprisingly,
we also "nd that U.S. "rms bene"t from a depreciation of the Deutschmark
relative to the dollar. This result is consistent with U.S. "rms gaining due to
income from their European operations, at the expense of their non-German
competitors when the Deutschmark depreciates. For all "rms, the estimated
exposure is stronger during periods of large and extended movements in real
currency values of the countries tested, as well as, during periods of relatively
high foreign competition.
A prediction of the theory is that a "rm's exchange rate exposure depends on
its foreign as well as its domestic demand elasticities. Therefore, because of the
di!erent characteristics of the "rms in the world automotive industry, the
components of this exposure should vary across markets. Consistent with this
prediction, the "ndings show that exposure varies across "rms from di!erent
countries.
In evaluating the exchange rate exposure of international "rms, it is important
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