Foreign Currency Translation Reporting and the Exchange-Rate Exposure Effect

Journal of International Financial Management and Accounting
Vol. 6, 1995

Abstract

This study further explores a structural break in the relation between stock returns of firms with foreign currency positions and lagged exchange rate changes (exchange rate exposure effect) documented in Bartov and Bodnar (1994). WE examine whether changes in the financial accounting reporting of foreign currency positions from SFAS No. 52 might have improved investors' ability to characterize correctly firms economic exchange rate exposures on a timely basis, and thus the impact of exchange rate movements on firm value. Our findings indicate that only firms reporting exclusively using the dollar as functional currency (i.e., those reporting as if they were still under SFAS No. 8) retain a significant relation between the lagged change in the dollar and firm value in the post SFAS No. 52 period. For those firms reporting using the foreign currency as functional currency, (i.e., those who switched to the new translation method) the significant lagged relation disappears. This is consistent with the use of of the foreign currency as functional currency under SFAS No. 52 facilitating valuation of U.S. firms with foreign operations.