Value Relevance of Foreign Currency Accounts: A study of US publicly listed firms value relevance with foreign currency transaction and translation factors

Abstract

Foreign currency risk has become an increasing concern for multinational companies, due to the expansion of business geographical scope and increased volatility of foreign exchange rates. The robustness of firm foreign currency exposure management is receiving more attention from many stakeholders. Companies exposed to foreign currency risk may experience severe profit and loss unpredictability. This can cause challenges to business decision-making and misinterpretation of performance from the firms, the investors, and the market. Therefore, it is crucial to understand the disclosure of foreign currency accounts in firms' financial statements and how they influence the market value of public firms. In this thesis, I discuss the research question regarding the value relevance of foreign currency transaction gains or losses and translation adjustment using a sample of US publicly listed firms that disclose such information from 2002 to 2020. I find that foreign currency transaction gains or losses and translation adjustment positively relate to firm stock return. I separately test firms reporting foreign currency transaction gains and foreign currency transaction losses, discovering that their association to firm value is positive and negative. I further discover that foreign currency translation adjustment is positively associated with firm stock return in the manufacturing industry. Foreign currency transaction is significantly value relevant for firms in the new economy when the analysis is taken for gains and losses separately. Also, I find foreign currency transaction is more value relevant than earnings, and the relevance is more substantial when it has a higher proportion of earnings. The value relevance of foreign currency transaction gain gets stronger with the time horizon increasing from three months to one year.