الزامات ذخیره سازی، نوسانات نرخ ارز، و ارزش شرکت

In this paper we investigate whether the imposition of the unremunerated reserve requirement on capital inflows influences exchange rate volatility and stock prices. Our analysis shows that exchange rate volatility of the Thai baht against four major currencies—the US dollar, the British pound, the euro, and the Japanese yen—appears to be larger during the period of the imposition of the unremunerated reserve requirement in 2006–2007. Using a data set of publicly traded firms in Thailand, we find that the exposure of firms to exchange rate volatility appears to change during the unremunerated reserve requirement period relative to the pre- and post-unremunerated reserve requirement period. We also find that the effect of exchange rate volatility during the unremunerated reserve requirement period on stock returns is stronger for some firms than others. The results suggest that the unremunerated reserve requirement affects asset prices, through larger exchange rate volatility and through changes in exposure of firms to exchange rate volatility.

Does exchange rate volatility affect firm performance? This question is important for at least two reasons. First, policy makers such as central bankers generally assume that high levels of exchange rate volatility have a negative effect on international trade. Therefore, one of the goals of monetary authorities is to minimize exchange rate volatility. Several scholars suggest that exchange rate volatility associated with flexible exchange rates tends to adversely affect economic activities such as investment (Darby et al., 1999), export (Baak et al., 2007 and Sauer and Bohara, 2001), and asset prices (Bodart and Reding, 1999). For example, Bagella et al. (2006) find that real effective exchange rate volatility is associated with the growth of per capita income. Bodart and Reding (1999) find that stabilizing exchange rates reduces the volatility of asset prices. However, several studies show that exchange rate volatility has a positive effect on trade flows. For example, McKenzie and Brooks (1997) find that exchange rate volatility is positively related to the volume of export from Germany to the US over the period 1973–1992. Likewise, McKenzie (1998) shows that exchange rate volatility has a positive effect on Australia's exports during the period 1947–1995. Overall, as noted by Sauer and Bohara (2001), the positive effect of exchange rate volatility on exports documented in prior studies remains puzzling and appears to vary across countries, thereby requiring further examination. Second, the question of the effect of exchange rate volatility on firm performance becomes even more crucial when monetary authorities consider using capital controls such as a market-based restriction on capital inflows in the form of the unremunerated reserve requirement (URR) rather than undertaking foreign exchange interventions. Since scholars and policy makers typically assume the negative effect of exchange rate volatility on firm performance, there is an ongoing discussion about how monetary authorities in both small and large economies should, and could, effectively deal with exchange rate movements, with the view that less volatile exchange rates are beneficial to international trade and national economies. It is well documented that, even in the free floating foreign exchange of the post Bretton Woods system, several central banks (e.g., Japan, Germany and the US) are active in foreign exchange intervention operations (see e.g., Bonser-Neal and Tanner, 1996, Dominguez, 1998 and Meese, 1990). A survey of Neely (2008) shows that monetary authorities do not agree that foreign exchange interventions cause exchange rates to be more volatile. Empirical evidence suggests that foreign exchange intervention appears to have no effect on exchange rate volatility (see e.g., Bonser-Neal and Tanner, 1996). Capital account restriction is another important tool for monetary authorities to deal with exchange rate movements. In recent years, we have observed that emerging market economies sometimes adopt the unremunerated reserve requirement as a means to reduce exchange rate fluctuations or prevent a rapid appreciation of a currency. Several countries such as Chile, Colombia and Thailand had implemented the unremunerated reserve requirement during the 1990s–2000s (Edwards, 1998a and Edwards and Rigobon, 2009). We notice that empirical studies on the effect of foreign exchange interventions on the volatility of exchange rates provide mixed results. While several scholars (e.g., Bonser-Neal and Tanner, 1996, Dominguez, 1998, Fatum, 2008 and Rogers and Siklos, 2003) find that there is little evidence to suggest that the monetary authorities’ interventions in foreign exchange market decrease the volatility of exchange rates, some scholars (Kim and Pham, 2006 and Rogers and Siklos, 2003) find that foreign exchange interventions appear to lower the volatility of exchange rates. Furthermore, several researchers (e.g., Dominguez, 1998 and Frenkel et al., 2005) report that interventions in foreign exchange markets are positively associated with exchange rate volatility. The findings in prior studies show that exchange rate volatility is associated with firm value. For example, Sercu and Vanhulle (1992) find that the relation between exchange rate volatility and the value of exporting firms is positive. It has also been found that exchange rate volatility is likely to affect the volatility of an internationally integrated stock market. More specifically, Kearney (1998) finds that during 1974–1994 the exchange rate volatility appears to influence the Irish stock market volatility. Koutmos and Martin (2003) find a negative relationship between the exchange rate volatility and the US stock index return during the sample period of 1992–1998. However, some scholars such as Devereux and Engel (2003) suggest that exchange rate volatility does not necessarily cause a negative effect on the domestic economy under certain circumstances. There is still little known about the indirect effect of the restrictions on capital inflows such as the unremunerated reserve requirement on firm performance through changes in exchange rate volatility. An important finding, as suggested by Edwards and Rigobon (2009), is that the unremunerated reserve requirement leads to larger exchange rate volatility. Scholars and policy makers who support the use of the unremunerated reserve requirement are likely to postulate that the positive effect of the unremunerated reserve requirement on exchange rate volatility in Chile, as reported by Edwards and Rigobon (2009), might be a country-specific phenomenon that is unlikely to occur in other economic conditions. Should further empirical evidence of the positive relation between the unremunerated reserve requirement and exchange rate volatility be found in other countries, the validity of the justification for implementing the unremunerated reserve requirement to lessen the degree of the exchange rate volatility would become weaker. To complement this line of research and shed light on this importance issue, we empirically investigate whether the imposition of the unremunerated reserve requirement affects firm value through foreign exchange channels. The imposition of the unremunerated reserve requirement by the Bank of Thailand on December 18, 2006, one of the latest implementations of the unremunerated reserve requirement in a small and open economy, allows us to examine the relation between capital account restriction, exchange rate volatility and firm value in the context of a small emerging market economy. In this paper we try to address the following key questions. First, does the imposition of the unremunerated reserve requirement reduce exchange rate volatility? To the best of our knowledge, with the exception of Edwards and Rigobon (2009), there is no other paper that systematically examines the effect of capital controls on exchange rate volatility. Second, is the effect of the unremunerated reserve requirement on exchange rate stability transmitted to asset prices? Our paper attempts to examine to what extent the unremunerated reserve requirement affects exchange rate volatility, which might in turn affects asset prices, thus shedding light on this relatively unexplored line of research. Hence, the objectives of this study are twofold: first, to provide a systematic description of exchange rate movements in Thailand during the period of the unremunerated reserve requirement; and second, to examine whether during the period of the unremunerated reserve requirement, the volatility of exchange rate affects equity prices differently than during the period of no unremunerated reserve requirement. We look at exchange rate volatility of the Thai baht relative to four major currencies including the US dollar, the British pound, the euro, and the Japanese yen between January 2005 and December 2009 and find that the volatility of exchange rates appears to be larger in magnitude during the unremunerated reserve requirement period. This result is consistent with Edwards and Rigobon (2009), who report that the unconditional volatility of exchange rate increases following the imposition of capital controls. With this result, we argue that the positive effect of the unremunerated reserve requirement on exchange rate volatility found in Chile is not a country-specific phenomenon, and that the unremunerated reserve requirement is likely to cause a hike in exchange rate volatility in developing countries. Therefore, the prediction that the imposition of the unremunerated reserve requirement would reduce exchange rate volatility appears to be incorrect. To examine the effect of exchange rate volatility on stock prices, we adopt augmented market models that are used in the exchange rate exposure literature by scholars such as Koutmos and Martin (2003) and Chue and Cook (2008). We find that there are a number of firms with significant coefficients of the URR dummy variable in our regression analyses. These findings suggest that the unremunerated reserve requirement affects equity prices of some firms through changes in the intercept term of the augmented market model. Furthermore, we find that the estimated coefficients of the interaction term between the unremunerated reserve requirement and exchange rate volatility are heterogeneous. That is, we find a number of firms with positive and statistically significant estimated coefficients and a number of firms with negative and statistically significant estimated coefficients. These findings suggest that the effect of exchange rate volatility on stock returns becomes stronger for some firms and weaker for others during the unremunerated reserve requirement period. Taken together, the results in this paper improve our understanding of the behavior of exchange rate volatility during the period of the unremunerated reserve requirement, complementing the literature on exchange rate volatility (see e.g., Beine et al., 2009, Edwards and Rigobon, 2009, Ganguly and Breuer, 2010 and Sideris, 2008). The paper also complements and expands the literature on the influence of capital account restrictions on firms (see e.g., Prati et al., 2009, Vithessonthi and Tongurai, 2010 and Wei and Zhang, 2007). The remainder of the paper proceeds as follows. Section 2 provides a review of literature on capital account restrictions, with primary focus on the impact of capital account restrictions such as the unremunerated reserve requirement on exchange rate volatility. Section 3 describes the implementation of the unremunerated reserve requirement in Thailand in 2006. We particularly focus on the unremunerated reserve requirement that was imposed in Thailand on December 18, 2006. Section 4 discusses the methodology and data set. Section 5 presents the results from testing the impact of exchange rate movements on equity prices at the firm level. Section 6 concludes the study.

Our study starts with a simple but important question: Do restrictions on capital inflows in the form of the unremunerated reserve requirement affect equity prices through changes in exchange rate volatility? In this paper we find several new insights that contribute to the literature on capital account restrictions and exchange rate volatility. First, our findings suggest that the volatility of exchange rates appears to increase during the period of the imposition of the unremunerated reserve requirement, which is consistent with Edwards and Rigobon (2009), who show that the imposition of capital controls leads to a hike in the unconditional volatility of exchange rate. We report an increase in the volatility of daily returns on nominal bilateral exchange rates of the Thai baht against four major currencies, namely, the US dollar, the British pound, the Japanese yen, and the euro, during the unremunerated reserve requirement period. Especially, the volatility of daily returns on nominal USD/THB exchange rates and the volatility of daily returns on nominal JPY/THB exchange rates appear to increase substantially following the imposition of the unremunerated reserve requirement in Thailand. Second, our regressions results show that there are a number of firms with significant coefficients of the URR dummy variable. This finding suggests that the unremunerated reserve requirement affects stock prices not only via a change in the systematic risk (e.g., changes in the market beta (Vithessonthi and Tongurai, 2012)) but also via other factors. The findings suggest that the unremunerated reserve requirement affects equity prices of some firms through changes in the intercept term of the augmented market model. We also find that the estimated coefficients of the interaction term between the unremunerated reserve requirement and exchange rate volatility for some firms are statistically significant, implying that the effect of exchange rate volatility on stock returns becomes stronger or weaker during the period of the unremunerated reserve requirement. Our results provide additional empirical evidence of the effect of the unremunerated reserve requirement on exchange rate volatility and equity prices. The results call into question the claim of monetary authorities that the unremunerated reserve requirement, which is one form of capital account restrictions, can effectively stabilize exchange rates and thus benefit firms. Our results for the firm-level sample indicate that the implementation of the unremunerated reserve requirement in Thailand exerts a negative effect on firm value by increasing, rather than decreasing, exchange rate volatility, which in turn affects equity prices. In this respect, our study extends the work of Edwards and Rigobon (2009), which has not examined the microeconomic aspects of capital controls, by investigating the indirect effect of the unremunerated reserve requirement on stock prices through changes in exchange rate volatility. It is important to note that while the sign of the effect of exchange rate volatility on equity prices is inconclusive (that is, the number of firms with positive and significant exchange rate volatility exposure is almost equal to the number of firms with negative and significant exchange rate volatility exposure), we interpret our results that the effect of the unremunerated reserve requirement varies across firms and industries. This interpretation is largely consistent with the view of Prati et al. (2009). Our study contributes to a better understanding of the effects of the unremunerated reserve requirement and the exchange rate exposure of firms. The findings in this paper provide additional empirical evidence on the implications for the unremunerated reserve requirement that the monetary authorities of emerging market countries have often resorted to as a means to stabilize exchange rates. In spite of the usefulness of the unremunerated reserve requirement in insulating domestic economy from external shocks, a question of the indirect effect of the unremunerated reserve requirement on firm value is an issue of concern to investors, which is partly addressed in this paper. There are at least three key limitations in this study. First, we examine only the case of restrictions on capital inflows, more specifically the unremunerated reserve requirement. We do not know whether restrictions on capital outflows such as the case of Malaysia in 1998 would yield different results. Future research should investigate the impact of restrictions on capital outflows on firm values. Second, this paper tests the impact of the unremunerated reserve requirement on equity prices through the link of the nominal USD/THB exchange rate. If Thai firms are exposed to foreign exchange risk of different currencies, for example the Japanese yen or the euro, the effects of the unremunerated reserve requirement on firm value might be different. We suggest the issue to be explored in future research. Last but not least, as we primarily focus on the effect of the unremunerated reserve requirement on exchange rate volatility, we do not explicitly control for other volatilities of economic variables (e.g., interest rate differentials) that might affect exchange rate volatility. Giannellis and Papadopoulos (2011) show that the monetary-side of the economy can influence exchange rate volatility.