Foreign exchange rates and the corporate choice of foreign entry mode

This study is the first attempt at examining the effects of foreign exchange (FX) rate and volatility on the corporate choice of foreign entry mode and shareholder wealth. For all worldwide US-related foreign direct investments (FDIs) announcements in 1995, we find evidence that, on average, a stronger home currency is related to a higher propensity to choose a subsidiary and that the change in shareholder wealth around subsidiary announcements is greater when the home currency is stronger for non-US parents. On the effects of host currency volatility, the data support the flexibility option (international diversification) hypothesis for the US (non-US) parents.