Value Relevance of Foreign Currency Fluctuation: Accounting or Economic Effect

Abstract

The purpose of this study is to examine empirically the impact of translation adjustments on stock returns. The sampling period covers a ten-year span from 2000 to 2009. Based on the earnings response coefficient model, our results show that translation adjustments are positively associated with stock returns, and thus suggesting that the accounting effect of translation adjustments dominates the economic effect. However, the result of the conditional association analysis shows that this relationship becomes statistically insignificant for firms with zero reported transaction gain/loss. Furthermore, when we examine the results by industry, we observe that stock returns are positively affected by an increase in translation adjustments only for the agriculture, manufacturing and finance industry. The year by year analysis shows that the impact of translation adjustments on stock returns is non-stationary. A strong economic effect is observed only in the Years 2000 and 2001 whereas a strong accounting effect is found in the Years 2008 and 2009.