Good News and Bad News About Firm‐Level Stock Returns of Internationally Exposed Firms

28 Pages Posted: 3 Dec 2014

See all articles by Carmelo Giaccotto

Carmelo Giaccotto

University of Connecticut - Department of Finance

Alain A. Krapl

Northern Kentucky University - Department of Economics and Finance

Date Written: December 2014

Abstract

We examine stock returns of firms with international exposure. Our empirical work relies on Campbell's variance decomposition framework. Not surprisingly, we find that the volatility of discount rate and cash flow news increase with the degree of international exposure. As firms globalize, the cash flow effect is good news, while the discount rate effect amounts to bad news. The surprising result is that the covariance between the news terms increases with international exposure. This finding provides indirect evidence for the proposition that foreign exchange (FX) risk is a priced factor in the cross‐section of risk‐adjusted expected returns.

JEL Classification: G12, G15; 330

Suggested Citation

Giaccotto, Carmelo and Krapl, Alain A., Good News and Bad News About Firm‐Level Stock Returns of Internationally Exposed Firms (December 2014). International Review of Finance, Vol. 14, Issue 4, pp. 523-550, 2014. Available at SSRN: https://ssrn.com/abstract=2533272 or http://dx.doi.org/10.1111/irfi.12033

Carmelo Giaccotto (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
202-486-4360 (Phone)
202-486-0349 (Fax)

Alain A. Krapl

Northern Kentucky University - Department of Economics and Finance ( email )

Haile/US Bank College of Business
Nunn Drive
Highland Heights, KY 41099
United States

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