Impact of Exchange Rate Fluctuations on Firm Profitability: Evidence from Energy Sector of Pakistan

Abstract

The study examined the impact of exchange rate movements on performance of energy sector firms of Pakistan. Having noted the effect of exchange rates on profitability of the firms, it was paramount to investigate the impact in Pakistani market. The unprejudiced objective of the research was to empirically investigate the impact on profitability ratios “Return on equity (ROE), Return on assets (ROA) and Return on capital employed (ROCE)” which were used as proxies to measure profitability. The study used descriptive analysis and ordinary least square methods to investigate the relationship. For that purpose, panel data was collected from 2008 to 2017. To have better understanding of the topic under study, firm and industry specific variables were introduced. The results of regression analysis revealed that exchange rate fluctuation has significant and positive effect on ROA and ROE, and insignificantly related to ROCE. Firm specific variables, firm size and liquidity have an insignificant impact on profitability, though leverage, tangibility and firm growth showed significant effect. On the other hand, industry specific variables such as Share of investment in Energy Sector and industrial growth showed significant and positive impact on firm performance. In brief, exchange rate shows a positive and significant impact on energy sector performance of Pakistan in terms of return on assets and equity recognizing the reliability of the sector on imports.