Media sentiment fluctuations on exchange rate, managerial risk appetite and FX derivatives usage

Abstract

As the RMB exchange rate reform deepens, Chinese firms' foreign exchange (FX) risk management has garnered increasing attention. Based on a big data from 3.83 million pieces of news published by 33 well-known comprehensive and financial newspapers in China, this paper constructs a sentiment lexicon using the N-gram model to measure the exchange rate's media sentiment through textual analysis. Utilizing 2007–2023 data from listed companies in China, we empirically examine the relationship among media sentiment fluctuations on exchange rate, managerial risk appetite and FX derivatives usage decisions. The findings indicate that media sentiment fluctuations on exchange rate can increase the probability of using FX derivatives and this process is influenced by managerial risk appetite. Heterogeneity analysis reveals that the impact of managerial risk appetite on the media sentiment motivations for using FX derivatives is more pronounced in firms with low equity balance, low institutional investor ownership, management lacking financial or international backgrounds, and low exposure to exchange rate risk. The relevant conclusions provide policy insights for firms to better respond to media coverage and external information, as well as to strengthen corporate governance and FX risk management.