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re,proprietary drug producers tend to have more foreign sales than generic drug mak-
Volume 28 Number 3 2002 57ers. Consequently, we would expect to observe a stronger exchange risk effect onproprietary drug makers than generic drug makers.Using a sample of US pharmaceutical firms during the period 1990-1999, we assessforeign exchange exposure using a two-factor model that has been employed by Jorion(1990) and Williamson (2001). The foreign exchange risk factor is proxied by themonthly change in the Broad Index, a relatively new series generated by the Federal Reserve.
2 The three major research hypotheses (in alternative form) are presented below:H1A: There is significant exchange rate exposure effect among US pharmaceuticalfirms.
H2A: There is a difference in the exchange rate exposure effect for firms producingproprietary drugs versus those producing generic drugs.
H3A: There is a difference in the exchange rate exposure effect between pre andpost-1995 for US pharmaceutical firms.
The rest of the article is organized as follows. Section 2 provides a discussion of theexchange rate exposure literature and Section 3 presents the selection procedure and datasources. The research design is described in Section 4. Empirical results and implicationsare provided in Sections 5 and 6, respectively.
2. Exchange Rate Exposure Literature
Employing the conditional version of the international capital asset pricing model(CAPM) first proposed by Harvey (1990), Dumas and Solnik (1995) provide empiricalevidence that the price of currency risk is significant. De Santis and Gerard (1998) findstrong support for the inclusion of foreign exchange risk in their test oftheinternationalCAPM. They used the parametric approach developed in De Santis and Gerard (1997) toanalyze the stock indexes for Germany, Japan, the UK, and the US. A direct consequenceof these findings is that international asset pricing models that include only the marketrisk are misspecified.Jorion (1990, 1991) uses arbitrage pricing theory to investigate the foreign exchangeeffect on US multinationals. He finds no evidence of a link between changes in exchangerates and firm value, concluding that US investors do not require a premium for bearing
exchange risk. Like Jorion, Bodnar and Gentry (1993) and Choi and Prasad (1995) providelittle evidence of an exchange rate effect on the valuation of US multinationals. Choiand Prasad (1995) report that only 61 firms (out of 409 US multinationals examined)have significant exchange risk sensitivities at the 0.10 level using two-tailed tests.
Bartov and Bodnar (1994) using a sample of 208 US multinationals for the 1978-1989 period document a lagged quarterly exchange rate effect, but find no effect for thecontemporaneous quarterly change in the exchange rate variable. Using a sample of the32 larger US exporters from 1982 to 1988, Amihud (1994) finds no evidence of a laggedmonthly or quarterly exchange rate effect. He also did not find a contemporaneous exchange
rate effect for his sample.Managerial Finance 58Using Japanese data, Choi, Hiraki and Takezawa (1998) and He and Ng (1998) findmixed evidence of an exchange rate effect. Booth and Rotenberg (1990) find similar resultsusing Canadian data.The most successful paper to date appears to be the study by Williamson (2001). Heexamines a small sample of US and Japanese automakers, and documents their significantexposure to exchange rate shocks. He also finds evidence of time本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。