An Investigation of the Valuation Relevance of Alternative Foreign Exchange Disclosures

43 Pages Posted: 14 Jun 2005

See all articles by Florin Sabac

Florin Sabac

University of Alberta - Department of Accounting, Operations & Information Systems

Thomas W. Scott

Independent

Heather A. Wier

University of Alberta - Department of Accounting, Operations & Information Systems

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Abstract

We demonstrate analytically and empirically that valuing a firm with foreign operations in the presence of exchange rate uncertainty requires information on the foreign operating cash flows disaggregated by currency and persistence. In particular, given consolidated earnings, investors need information on the exchange gain or loss on permanent foreign operating cash flows. We extend the model to show how the permanent foreign cash flows can be used to condition the change in the translation adjustment to make it value relevant; however, using the permanent foreign cash flows directly is superior for valuation. The empirical tests support our hypothesis that the market response to exchange rate movements is sensitive to the relative magnitudes of revenues and costs denominated in each foreign currency in which a firm has transactions. Disclosure of cash flows by currency should enhance the valuation of firms with foreign operations.

Keywords: Foreign exchange, valuation, translation adjustment

JEL Classification: G12, M41, M45

Suggested Citation

Sabac, Florin and Scott, Thomas W. and Wier, Heather A., An Investigation of the Valuation Relevance of Alternative Foreign Exchange Disclosures. Available at SSRN: https://ssrn.com/abstract=742744

Florin Sabac

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada

Heather A. Wier

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada
780-492-3053 (Phone)
780-420-3325 (Fax)

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