Measuring macroeconomic exposures through commercial cash flows - A case study of selected firms in the communication equipment industry

Abstract

Firms, especially multinational firms, nowadays are facing various sources of macroeconomic risks. We employ the cash flow approach to estimate the macroeconomic risks for five leading multinational firms namely Nokia, Ericsson, Motorola, Alcatel and Siemens in the communication equipment industry for the period from 1998 to 2005. Firms’ quarterly commercial cash flows are used as dependent variable. Explanatory variables are macroeconomic variables including foreign exchange rates, interest rates, consumer price indices, producer price indices, world oil prices, world non-energy commodities prices and industry relative prices. We run the multiple regression between those variables. The results indicate that firms are exposed to at least one of the selected macroeconomic variables. However, the exposure is not consistent among sampled firms. Euro currency does not play an important role in firms’ commercial cash flows. We examine two possible elements that may affect our regression results including potential drawbacks in the use of accounting cash flows data to measure macroeconomic exposures and the existence of potential mispricing.