The impact of exchange rate volatility on the profitability of non-financial publicly listed firms in the Philippines

Exchange rate volatility poses a challenge for firms since it increases the exchange rate risk associated with trading goods and services whether internationally or domestically. Prior literature shows that there is no consensus regarding the impact of exchange rate volatility on firm profitability since results vary depending on the country and industry being examined. Moreover, there is no consensus regarding the relationship of foreign currency risk exposure between firm profitability. Despite this, it was argued that firms can hedge away their foreign currency risk. In this study, the impact of real exchange rate volatility on the profitability of non-financial publicly listed firms in the Philippines from 2008 to 2019 was examined. Using the real effective exchange rate, nominal bilateral exchange rate, and real bilateral exchange rate as measures of exchange rate volatility and three measures of firm profitability, this study analyzed the impact of exchange rate volatility on profitability using a two-step Arellano- Bond System Generalized Method of Moments (GMM) estimator on an unbalanced panel dataset. We found that firm profitability is not affected by exchange rate volatility regardless of their proxies. Moreover, the impact of exchange rate volatility on firm profitability does not depend on the firms’ level of exposure to the international environment. Rather, it depends on whether or not firms use hedging strategies in order to mitigate their foreign currency risk. Since we found that the use of foreign currency risk hedging strategies is what dampens the impact of exchange rate volatility, this study will be beneficial to corporate managers who seek to mitigate the impact of foreign exchange rate volatility on their firms’ profitabilit