Digesting FOREXS

48 Pages Posted: 7 Jul 2020

See all articles by Joon Woo Bae

Joon Woo Bae

Case Western Reserve University - Weatherhead School of Management

Zhi Da

University of Notre Dame - Mendoza College of Business

Virgilio Zurita

Baylor University

Date Written: November 12, 2019

Abstract

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

Bae, Joon Woo and Da, Zhi and Zurita, Virgilio, Digesting FOREXS (November 12, 2019). Available at SSRN: https://ssrn.com/abstract=3624449 or http://dx.doi.org/10.2139/ssrn.3624449

Joon Woo Bae

Case Western Reserve University - Weatherhead School of Management ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

Zhi Da

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Virgilio Zurita (Contact Author)

Baylor University ( email )

Waco, TX 76798
United States

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