Investigating the impact of exchange rate fluctuations (dollar) on Tehran Stock Exchange indices, a case study, pharmaceutical materials and industry index and wood products industry index

Abstract

Adopting a suitable currency regime and a balanced exchange rate is one of the important and sometimes controversial issues. Some economists believe that the low nominal (or real) exchange rate causes export stagnation and reduced incentives for domestic production to replace imports. Others believe that the policy of devaluation of the national currency or the high exchange rate has a contractionary effect on production.

In this study, using econometric tests, the effect of exchange rate fluctuations on profitability or more precisely (the statistical population of this research includes all manufacturing companies admitted to the Tehran Stock Exchange) stock returns of materials and pharmaceutical products and wood products industry, the former has a very low demand elasticity and the latter has a very high demand elasticity during the years 1386-1391 is studied. is studied. This study helps a lot to understand the effect of foreign exchange policies on the financial status and profitability of companies and economic units. In this study, seven hypotheses were proposed, and the results of the work are briefly stated in the fourth chapter: in the fourth chapter, descriptive statistics were first presented, and in the rest of this section, the Scatter-Pilot and Box-Whisker charts were presented, and it was shown that the outlier data in the statistical sample are very small and did not have a serious impact on the results of the regression models of the research. In the next part, the results of Pearson's correlation coefficient confirmed the existence of correlation between all research variables. Also, the results of the test of the first to sixth hypotheses indicated the significance of the relationships between the independent and dependent variables. Keywords: exchange rate fluctuations, Tehran Stock Exchange, industry index Chapter 1 Introduction to the research

Different and diverse factors affect the stock returns of manufacturing companies, among these macroeconomic variables are inflation, oil prices, national income and economic growth, one of these factors that we have witnessed very drastic changes and fluctuations in recent years is the exchange rate. In such a way that the parity of the Iranian rial against the dollar has reached from 10,000 rials in 1988 to 37,000 rials in the middle of 1991.

After World War II and the collapse of the gold-based monetary system in 1946, most countries had a monetary system in which the US dollar system was accepted as the base currency of the countries. 1960 was the end of valid currencies, especially the dollar. After the collapse of the Bretton Woods system in the early 1970s, industrialized countries first switched to a floating exchange rate system, then gradually most countries followed the floating exchange rate system. It was from this time that the international economic environment witnessed fluctuations in the exchange rate between different countries, which naturally affected companies as well. The fluctuation of the company's value against the exchange rate, which occurs due to changes in the value of the national currency against the currency of other countries, is called exchange rate risk. (Bayat. M.; 2015 page 24) due to the continuous and interdependence of monetary and financial markets and economic environments and their influence on each other in different parts of the world, all companies are directly or indirectly exposed to exchange rate risk, among which multinational companies and those that have international exchanges will have a greater share of this risk. Recently, this issue has become more apparent in our country, and due to the extreme fluctuations of the exchange rate, exchange rate risk has been considered more in the field of risk management, and along with other macroeconomic variables such as inflation, oil prices, national income, and economic growth, the exchange rate has been raised as one of the factors affecting the stock returns of manufacturing companies. Therefore, in this research, we have clarified the dimensions of the impact of significant fluctuations in the exchange rate on the stock returns of the materials and pharmaceutical products industry index and the wood products industry index.

1-2 - Statement of the problem

Adoption of a suitable currency regime and equilibrium exchange rate is one of the important and sometimes controversial issues. Some economists believe that the low nominal (or real) exchange rate causes export stagnation and reduced incentives for domestic production to replace imports.Others believe that the policy of devaluation of the national currency or high exchange rate has a shrinking effect on production. There are different views regarding the transition from the multi-rate system to the single-rate system. Supporters of exchange rate equalization (usually exchange rate equalization is accompanied by a decrease in the value of the national currency) believe that an increase in the exchange rate has an expansionary effect on the economy. With the increase in the exchange rate, the amount of exports of economic enterprises increases, and due to the increase in the price of imports, the amount of imports decreases and leads to import substitution. The single rate of the currency also causes a change in the relative prices inside and outside and helps in the correct allocation of domestic resources. Opponents of the equalization of the exchange rate believe that an increase in the exchange rate has a contractionary effect on the economy. Because an increase in the exchange rate causes an increase in the price of production inputs and imported capital goods, an increase in costs, especially investment costs, and therefore a decrease in profitability and production.

Although the above topics are often discussed in the macro dimension of currency, the impact of foreign exchange policy on economic enterprises in the micro dimension is also of particular importance. In fact, the expected effects of the policies in the macro dimension arise from the impact of these policies on the performance of the set of economic units in the micro dimension. Exchange rate changes cause changes in the prices of goods and services, production inputs and outputs, and thus affect the expected current and future cash flows and returns on shares of an economic enterprise.

In this study, using econometric tests, the effect of exchange rate fluctuations on profitability or, more precisely, the return on shares of the materials industry, pharmaceutical products, and wood products, where the former has a very low demand elasticity and the latter has a very high demand elasticity, is studied. This study helps a lot to understand the effect of foreign exchange policies on the financial status and profitability of companies and economic units.

The fluctuation of the company's cash flows against changes in the exchange rate is called currency risk [1] or exchange rate volatility [2]. The value of the company is exposed to exchange rate fluctuations when the company's financial and operational status changes with exchange rate changes. In the financial literature, exchange rate risk is also called the volatility of the economy[3].

There are various theoretical models to explain the effect of the exchange rate on the value of the company:

Gordon Bodnar and William Gentry (1993) argue that the relationship between the profitability of the company and changes in the exchange rate depends on the nature and type of industry activity. An increase in the exchange rate makes export goods cheaper in the market of the importing country, and if the demand elasticity is high in the importing country, the amount of exports will increase and the exporter will benefit. On the other hand, an increase in the exchange rate makes imports more expensive and the value of the importing company decreases, unless the importer can pass the price increase to the final consumer. Of course, institutions that have foreign currency assets become more valuable with the increase in the exchange rate of their assets, in contrast to companies that have foreign currency debt, the increase in the exchange rate causes the burden of the company's debt and decreases the value of the company for the shareholders. Therefore, the basic issue of the present research is the answer to this basic question, considering that the elasticity of different goods is different, what is the effect of exchange rate fluctuations on industries with different elasticity, and we investigated more precisely what effect exchange rate fluctuations (dollar) have on the index of the materials and pharmaceutical products industry and the wood products industry? So that the goal of investors is to maximize the expected return. Return in the investment process is a driving force that motivates and is considered a reward for investors. Return from investment is important for investors; Because all investment decisions are made in order to get returns. In the meantime, risk is an important inhibitory factor in obtaining the expected return. One of the important factors in risk management; Exchange rate risk. In fact, exchange rate fluctuations are one of the important economic factors in the company, which affect the future profitable opportunities and the company's risk level.