Pricing Currency Exposure of Multinational Firms from Sales Disclosures Across Geographies

46 Pages Posted: 15 May 2015 Last revised: 21 Jan 2020

See all articles by Afonso V. Januario

Afonso V. Januario

Schroders

Jonathan Jona

Tulane University, A.B. Freeman School of Business, Finance & Economics, Students

Date Written: June 19, 2019

Abstract

We investigate the role of currency exposure through multinational firms’ operations as a source of mispricing in equity markets. Using information on firms' distribution of sales across geographic segments to construct firm-specific currency baskets, we find a strong correlation between firms' past currency returns, future firm fundamentals, and stock performance. Our measure of firm-currency returns predicts variations in operating performance. We do not find evidence that this information is priced around earnings announcement days. Regardless, we find that our measure predicts stock returns after controlling for industry, a firm's own stock reversal and momentum, exposure to specific regions, country returns, and the disclosure of gains or losses from derivatives. A simple trading strategy exploring these findings yields an abnormal monthly return of 63 basis points (7.56% annualized), significant at the 1% level. The performance of our trading strategy is robust to controlling for equity and currency risk factors, different sample periods and filters, measures of investor inattention or firm complexity, and disclosure of gains or losses from foreign currency adjustments or cash-flow hedges. Furthermore, we show that our results are not driven by a multinational premium, but by a time-varying exposure to multinational or domestic firms.

Keywords: Forecasting Stock Returns, Exchange Rates, Carry, Momentum, Geographic Segments

JEL Classification: F31, G12, G15

Suggested Citation

Januario, Afonso Varatojo and Jona, Jonathan, Pricing Currency Exposure of Multinational Firms from Sales Disclosures Across Geographies (June 19, 2019). Available at SSRN: https://ssrn.com/abstract=2606197 or http://dx.doi.org/10.2139/ssrn.2606197

Afonso Varatojo Januario (Contact Author)

Schroders ( email )

31 Gresham Street
London, EC2V 7QA
United Kingdom

HOME PAGE: http://https://sites.google.com/site/afonsovj/

Jonathan Jona

Tulane University, A.B. Freeman School of Business, Finance & Economics, Students ( email )

7 McAlister Drive
New Orleans, LA
United States

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