Wayne R Guay
University of Pennsylvania
David Haushalter
Susquehanna International Group, LLP
Bernadette Minton
The Ohio State University
Abstract: We find that investors and analysts encounter difficulties estimating the earnings effects of firms' exposures to interest rate, exchange rate, and commodity price risk. Stock returns around earnings announcements are associated with the magnitude of both recent quarter and lagged shocks to interest rates, exchange rates and commodity prices, especially for firms with large ex-ante exposures to these risks. Although intra-quarter revisions to analysts' forecasts do incorporate information about the earnings effects of the risk shocks, analystsÂ’ earnings forecasts do not fully resolve the uncertainty created by recent quarter and lagged shocks. Overall, the results suggest that analysts resolve 25%-60% of the total uncertainty created by interest rate, exchange rate, and commodity price shocks. The results are consistent with arguments that corporate financial risk exposures are not transparent to investors or analysts, and support recent research arguing that firms' hedging strategies consider this source of earnings uncertainty.
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