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A re-examination of exposure to exchange rate risk: The impact of earnings management and currency derivative usage

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  • Chang, Feng-Yi
  • Hsin, Chin-Wen
  • Shiah-Hou, Shin-Rong

Abstract

In an attempt to explain the weak evidence of priced exchange rate risk, we hypothesize that in addition to currency derivative usages, earnings management serves as another factor contributing to a reduction in exchange rate exposure. Our evidence reveals that earnings management activities, particularly those undertaken for the purpose of income smoothing, significantly reduce firm-specific exchange rate exposure, and that such role is particularly important if appropriate currency derivative instruments are limited. These results complement prior attempts to explain the puzzle of unpriced exchange rate risk. The investigation also highlights the importance of recognizing different managerial purposes behind discretionary accruals.

Suggested Citation

  • Chang, Feng-Yi & Hsin, Chin-Wen & Shiah-Hou, Shin-Rong, 2013. "A re-examination of exposure to exchange rate risk: The impact of earnings management and currency derivative usage," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3243-3257.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:8:p:3243-3257
    DOI: 10.1016/j.jbankfin.2013.03.007
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    4. Bruno Freitas Boynard de Vasconcelos & Benjamin Miranda Tabak, 2014. "Banking Systemic Risk, Foreign Funding, Exchange Rate Exposure and Carry Trade: is there a relation?," Working Papers Series 365, Central Bank of Brazil, Research Department.
    5. Entrop, Oliver & Merkel, Matthias F., 2018. ""Exchange rate risk" within the European Monetary Union? Analyzing the exchange rate exposure of German firm," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe B-31-18, University of Passau, Faculty of Business and Economics.
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    More about this item

    Keywords

    Currency derivatives; Earnings management; Exchange rate risk exposure; Hedging;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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