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The valuation-relevance of the foreign translation adjustment: The impact of barriers to entry and rigidity of wages
Suresh Radhakrishnan , University of Texas at Dallas
Albert Tsang, University of Texas at Dallas
ABSTRACT. We examine the economic effects of barriers to entry and rigidity of wages signaled by the foreign currency translation adjustment (FTA) on multinational firms’ stock returns. Specifically, based on economic theories an appreciation (depreciation) of the foreign currency exchange rate could signal (a) an increase (decrease) in the foreign country’s economic growth leading to potentially higher future cash flows for firms operating in environments with barriers to entry: innovation-intensive companies and asset-intensive companies, and (b) a decrease (increase) in future profits for firms operating in environments with rigidity of wages: labor-intensive companies. We find that the FTA is positively associated with abnormal stock returns for R&D leaders and asset-intensive, R&D followers. We also find that the FTA is negatively associated with abnormal stock returns for labor-intensive, R&D followers.
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