48 Pages Posted: 7 Jul 2020
Date Written: November 12, 2019
We provide novel evidence that investors of U.S. multinational firms react to firms' foreign exchange exposure shocks with a delay. Using the cross-section of currency returns and the relative presence of the firm in foreign economies, we compute a foreign operations related exchange shock (FOREXS) measure. We find FOREXS to predict firms' future cash flows and stock returns, driving much of the previous documented underreaction to foreign information. A strategy that buys stocks with high FOREXS and shorts stocks with low FOREXS yields a 6.74% annualized abnormal return. The predictive power arises from three reinforcing channels: incomplete hedging, information uncertainty, and limited investor attention. We highlight the important role of investor attention in facilitating information transmission across asset classes.
Keywords: return predictability, currency information, foreign operations
JEL Classification: G12, G15
Suggested Citation: Suggested Citation