Foreign Exchange Governance and Financial Stability of Multinationals: Cross-Country Evidence

This study examines the association between foreign exchange (FX) governance and financial stability by analysing empirical evidence from multinational entities. We analyse a 16-year panel (2009–2024) comprising 6613 firm-year observations using OLS regression with industry and year fixed effects. Firm-level data on financial sustainability, FX governance, board attributes, and controls are drawn from the London Stock Exchange Group (formerly Refinitiv), while country-level institutional and economic indicators are obtained from the World Bank. The result suggests that FX governance is negatively associated with earnings volatility, implying that FX governance enhances the financial stability of organisations. The baseline result is robustness to endogeneity and selection bias. However, our subsample analysis reveals that the impact of FX governance on financial stability varies based on institutional quality and industry. Whereas FX governance is negatively associated with earnings volatility thus enhancing financial stability in high-institutional-quality settings, the impact is not significant in low-institutional-quality environments. This study contributes to knowledge by empirically validating the relevance of FX governance to financial stability. Our study also contributes to the limited studies on the role of FX governance in diminishing earnings volatility, thus exposing FX management as a strategy for achieving financial sustainability. The international sample analysed in the study contributes to the generalisability of results.