This paper explores the relation between foreign exchange exposure and financial distress and bankruptcy. Using different measures of short-term and long-term FX exposure, we find a positive relation between FX exposure and financial distress. The results hold for ex-ante and expost measures of financial distress. Additional tests reveal that the relation between FX exposure and financial distress is bidirectional and similar for firms with negative as well as positive FX exposures. Moreover we find that results are considerably stronger during the Asian Financial Crisis, an event tied to frequent FX related shocks, but weaker during the Global Financial Crisis which was mainly a default-driven event. This distinction in combination with additional empirical evidence identifies FX exposure as a contributing factor of distress risk and potential determinant of corporate bankruptcy.
Key words: Foreign exchange, FX exposure, financial distress, bankruptcy
