IDEAS home Printed from https://ideas.repec.org/a/eee/riibaf/v39y2017ipap215-238.html
   My bibliography  Save this article

The effects of fair value reporting on corporate foreign exchange exposures

Author

Listed:
  • Krapl, Alain
  • Salyer, Robert

Abstract

We analyze the effects of fair value reporting standards (FVR) SFAS 133 and IAS 39 on foreign exchange (FX) exposures of U.S. multinational firms. We observe reductions in FX exposures to developed market currencies that coincide with the implementation of FVR. Risk reductions mainly affect U.S. multinational firms and to a much lesser extent matched control groups of domestic firms. For firms with exposures to emerging market currencies, we observe no changes in positive FX exposures but substantial shifts in negative exposures resulting in a change of exposure direction. Additionally we report changes in FX exposure asymmetry affecting multinational and domestic firms. Observed results are robust to several alternative model specifications and are unlikely explained by the launch of the euro, changes in firm-level FX exposure determinants, the rise and decline of technology shocks, shifts in systematic risk factors, or the Asian Financial Crisis.

Suggested Citation

  • Krapl, Alain & Salyer, Robert, 2017. "The effects of fair value reporting on corporate foreign exchange exposures," Research in International Business and Finance, Elsevier, vol. 39(PA), pages 215-238.
  • Handle: RePEc:eee:riibaf:v:39:y:2017:i:pa:p:215-238
    DOI: 10.1016/j.ribaf.2016.07.037
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0275531916302100
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.ribaf.2016.07.037?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Carrieri, Francesca & Errunza, Vihang & Majerbi, Basma, 2006. "Does Emerging Market Exchange Risk Affect Global Equity Prices?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(3), pages 511-540, September.
    3. Bartram, Sohnke M. & Karolyi, G. Andrew, 2006. "The impact of the introduction of the Euro on foreign exchange rate risk exposures," Journal of Empirical Finance, Elsevier, vol. 13(4-5), pages 519-549, October.
    4. Christopher C. Géczy & Bernadette A. Minton & Catherine M. Schrand, 2007. "Taking a View: Corporate Speculation, Governance, and Compensation," Journal of Finance, American Finance Association, vol. 62(5), pages 2405-2443, October.
    5. Bartov, Eli & Bodnar, Gordon M. & Kaul, Aditya, 1996. "Exchange rate variability and the riskiness of U.S. multinational firms: Evidence from the breakdown of the Bretton Woods system," Journal of Financial Economics, Elsevier, vol. 42(1), pages 105-132, September.
    6. Kelsey D. Wei & Laura T. Starks, 2013. "Foreign Exchange Exposure Elasticity and Financial Distress," Financial Management, Financial Management Association International, vol. 42(4), pages 709-735, December.
    7. Aggarwal, Raj & Harper, Joel T., 2010. "Foreign exchange exposure of "domestic" corporations," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1619-1636, December.
    8. Hodder, James E., 1982. "Exposure to exchange-rate movements," Journal of International Economics, Elsevier, vol. 13(3-4), pages 375-386, November.
    9. Christos Pantzalis & Betty J Simkins & Paul A Laux, 2001. "Operational Hedges and the Foreign Exchange Exposure of U.S. Multinational Corporations," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 32(4), pages 793-812, December.
    10. Bartram, Söhnke M., 2008. "What lies beneath: Foreign exchange rate exposure, hedging and cash flows," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1508-1521, August.
    11. Gordon M. Bodnar & Bernard Dumas & Richard C. Marston, 2002. "Pass‐through and Exposure," Journal of Finance, American Finance Association, vol. 57(1), pages 199-231, February.
    12. Matti Keloharju & Mervi Niskanen, 2001. "Why Do Firms Raise Foreign Currency Denominated Debt? Evidence from Finland," European Financial Management, European Financial Management Association, vol. 7(4), pages 481-496, December.
    13. Wei Chen & Hun‐Tong Tan & Elaine Ying Wang, 2013. "Fair Value Accounting and Managers' Hedging Decisions," Journal of Accounting Research, Wiley Blackwell, vol. 51(1), pages 67-103, March.
    14. Koutmos, Gregory & Martin, Anna D., 2007. "Modeling time variation and asymmetry in foreign exchange exposure," Journal of Multinational Financial Management, Elsevier, vol. 17(1), pages 61-74, February.
    15. Richie, Nivine & Glegg, Charmaine & Gleason, Kimberly C., 2006. "The effects of SFAS 133 on foreign currency exposure of US-based multinational corporations," Journal of Multinational Financial Management, Elsevier, vol. 16(4), pages 424-439, October.
    16. Jongmoo Jay Choi & Anita Mehra Prasad, 1995. "Exchange Risk Sensitivity and Its Determinants: A Firm and Industry Analysis of U.S. Multinationals," Financial Management, Financial Management Association, vol. 24(3), Fall.
    17. Ernst R. Berndt & Bronwyn H. Hall & Robert E. Hall & Jerry A. Hausman, 1974. "Estimation and Inference in Nonlinear Structural Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 4, pages 653-665, National Bureau of Economic Research, Inc.
    18. Bartram, Sohnke M., 2004. "Linear and nonlinear foreign exchange rate exposures of German nonfinancial corporations," Journal of International Money and Finance, Elsevier, vol. 23(4), pages 673-699, June.
    19. Chaieb, Ines & Mazzotta, Stefano, 2013. "Unconditional and conditional exchange rate exposure," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 781-808.
    20. Belén Villalonga, 2004. "Does Diversification Cause the "Diversification Discount"?," Financial Management, Financial Management Association, vol. 33(2), Summer.
    21. Bartram, Söhnke M. & Brown, Gregory W. & Minton, Bernadette A., 2010. "Resolving the exposure puzzle: The many facets of exchange rate exposure," Journal of Financial Economics, Elsevier, vol. 95(2), pages 148-173, February.
    22. Dominguez, Kathryn M.E. & Tesar, Linda L., 2006. "Exchange rate exposure," Journal of International Economics, Elsevier, vol. 68(1), pages 188-218, January.
    23. Dumas, B, 1978. "The Theory of the Trading Firm Revisited," Journal of Finance, American Finance Association, vol. 33(3), pages 1019-1030, June.
    24. Choi, Jongmoo Jay & Kim, Yong-Cheol, 2003. "The Asian exposure of U.S. firms: Operational and risk management strategies," Pacific-Basin Finance Journal, Elsevier, vol. 11(2), pages 121-138, April.
    25. Muller, Aline & Verschoor, Willem F.C., 2006. "Asymmetric foreign exchange risk exposure: Evidence from U.S. multinational firms," Journal of Empirical Finance, Elsevier, vol. 13(4-5), pages 495-518, October.
    26. Bartram, Söhnke M. & Brown, Gregory W. & Conrad, Jennifer, 2011. "The Effects of Derivatives on Firm Risk and Value," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(4), pages 967-999, August.
    27. David M Reeb & Chuck C Y Kwok & H Young Baek, 1998. "Systematic Risk of the Multinational Corporation," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 29(2), pages 263-279, June.
    28. Leif Beisland & Dennis Frestad, 2013. "How fair-value accounting can influence firm hedging," Review of Derivatives Research, Springer, vol. 16(2), pages 193-217, July.
    29. Laux, Christian & Leuz, Christian, 2009. "The crisis of fair-value accounting: Making sense of the recent debate," Accounting, Organizations and Society, Elsevier, vol. 34(6-7), pages 826-834, August.
    30. George Allayannis & Jane Ihrig & James P. Weston, 2001. "Exchange-Rate Hedging: Financial versus Operational Strategies," American Economic Review, American Economic Association, vol. 91(2), pages 391-395, May.
    31. Tai, Chu-Sheng, 2008. "Asymmetric currency exposure and currency risk pricing," International Review of Financial Analysis, Elsevier, vol. 17(4), pages 647-663, September.
    32. Korhonen, Iikka & Wachtel, Paul, 2006. "A note on exchange rate pass-through in CIS countries," Research in International Business and Finance, Elsevier, vol. 20(2), pages 215-226, June.
    33. Gregory W. Brown & Klaus Bjerre Toft, 2002. "How Firms Should Hedge," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1283-1324.
    34. Karl V. Lins & Henri Servaes & Ane Tamayo, 2011. "Does Fair Value Reporting Affect Risk Management? International Survey Evidence," Financial Management, Financial Management Association International, vol. 40(3), pages 525-551, September.
    35. Anderson, Brian P. & Makar, Stephen D. & Huffman, Stephen H., 2004. "Exchange rate exposure and foreign exchange derivatives: do ineffective hedgers modify future derivatives use?," Research in International Business and Finance, Elsevier, vol. 18(2), pages 205-216, June.
    36. Bodnar, Gordon M. & Gentry, William M., 1993. "Exchange rate exposure and industry characteristics: evidence from Canada, Japan, and the USA," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 29-45, February.
    37. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    38. Aggarwal, Raj & Berrill, Jenny & Hutson, Elaine & Kearney, Colm, 2011. "What is a multinational corporation? Classifying the degree of firm-level multinationality," International Business Review, Elsevier, vol. 20(5), pages 557-577, October.
    39. Jia He & Lilian K. Ng, 1998. "The Foreign Exchange Exposure of Japanese Multinational Corporations," Journal of Finance, American Finance Association, vol. 53(2), pages 733-753, April.
    40. Gordon M. Bodnar & Gregory S. Hayt & Richard C. Marston, 1998. "1998 Wharton Survey of Financial Risk Management by US Non-Financial Firms," Financial Management, Financial Management Association, vol. 27(4), Winter.
    41. Martin Glaum & André Klöcker, 2011. "Hedge accounting and its influence on financial hedging: when the tail wags the dog," Accounting and Business Research, Taylor & Francis Journals, vol. 41(5), pages 459-489, December.
    42. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. "Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-1658, December.
    43. Zhang, Haiwen, 2009. "Effect of derivative accounting rules on corporate risk-management behavior," Journal of Accounting and Economics, Elsevier, vol. 47(3), pages 244-264, June.
    44. Krapl, Alain A., 2015. "Corporate international diversification and risk," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 1-13.
    45. Jorion, Philippe, 1990. "The Exchange-Rate Exposure of U.S. Multinationals," The Journal of Business, University of Chicago Press, vol. 63(3), pages 331-345, July.
    46. Koutmos, Gregory & Martin, Anna D., 2003. "Asymmetric exchange rate exposure: theory and evidence," Journal of International Money and Finance, Elsevier, vol. 22(3), pages 365-383, June.
    47. Krapl, Alain A. & White, Reilly S., 2016. "Executive pensions, risk-shifting, and foreign exchange exposure," Research in International Business and Finance, Elsevier, vol. 38(C), pages 376-392.
    48. Guay, Wayne R., 1999. "The impact of derivatives on firm risk: An empirical examination of new derivative users1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 319-351, January.
    49. Choi, Jongmoo Jay & Jiang, Cao, 2009. "Does multinationality matter? Implications of operational hedging for the exchange risk exposure," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 1973-1982, November.
    50. Chernenko, Sergey & Faulkender, Michael, 2011. "The Two Sides of Derivatives Usage: Hedging and Speculating with Interest Rate Swaps," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(6), pages 1727-1754, December.
    51. Krapl, Alain & O'Brien, Thomas J., 2015. "Direct versus indirect regression estimates of foreign exchange cash flow exposure," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 103-112.
    52. Dey, Aiyesha, 2010. "The chilling effect of Sarbanes-Oxley: A discussion of Sarbanes-Oxley and corporate risk-taking," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 53-57, February.
    53. Geczy, Christopher & Minton, Bernadette A & Schrand, Catherine, 1997. "Why Firms Use Currency Derivatives," Journal of Finance, American Finance Association, vol. 52(4), pages 1323-1354, September.
    54. Allayannis, George & Ofek, Eli, 2001. "Exchange rate exposure, hedging, and the use of foreign currency derivatives," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 273-296, April.
    55. Bargeron, Leonce L. & Lehn, Kenneth M. & Zutter, Chad J., 2010. "Sarbanes-Oxley and corporate risk-taking," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 34-52, February.
    56. Gordon M. Bodnar & M.H. Franco Wong, 2003. "Estimating Exchange Rate Exposures: Issues in Model Structure," Financial Management, Financial Management Association, vol. 32(1), Spring.
    57. Tom Aabo, 2006. "The Importance of Corporate Foreign Debt in Managing Exchange Rate Exposures in Non‐Financial Companies," European Financial Management, European Financial Management Association, vol. 12(4), pages 633-649, September.
    58. Eli Ofek & Matthew Richardson, 2003. "DotCom Mania: The Rise and Fall of Internet Stock Prices," Journal of Finance, American Finance Association, vol. 58(3), pages 1113-1138, June.
    59. Michael Faulkender, 2005. "Hedging or Market Timing? Selecting the Interest Rate Exposure of Corporate Debt," Journal of Finance, American Finance Association, vol. 60(2), pages 931-962, April.
    60. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sticca, Ralph Melles & Nakao, Silvio Hiroshi, 2019. "Hedge accounting choice as exchange loss avoidance under financial crisis: Evidence from Brazil," Emerging Markets Review, Elsevier, vol. 41(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Krapl, Alain A., 2017. "Asymmetric foreign exchange cash flow exposure: A firm-level analysis," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 48-72.
    2. He, Qing & Liu, Junyi & Zhang, Ce, 2021. "Exchange rate exposure and its determinants in China," China Economic Review, Elsevier, vol. 65(C).
    3. Hutson, Elaine & Laing, Elaine, 2014. "Foreign exchange exposure and multinationality," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 97-113.
    4. Muller, Aline & Verschoor, Willem F.C., 2006. "Foreign exchange risk exposure: Survey and suggestions," Journal of Multinational Financial Management, Elsevier, vol. 16(4), pages 385-410, October.
    5. Krapl, Alain A., 2020. "The time-varying diversifiability of corporate foreign exchange exposure," Journal of Corporate Finance, Elsevier, vol. 65(C).
    6. Krapl, Alain & O'Brien, Thomas J., 2015. "Direct versus indirect regression estimates of foreign exchange cash flow exposure," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 103-112.
    7. Aabo, Tom & Ploeen, Rasmus, 2014. "The German humpback: Internationalization and foreign exchange hedging," Journal of Multinational Financial Management, Elsevier, vol. 27(C), pages 114-129.
    8. Belghitar, Yacine & Clark, Ephraim & Mefteh, Salma, 2013. "Foreign currency derivative use and shareholder value," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 283-293.
    9. Young Sang Kim & Junyoup Lee & Ha-Chin Yi, 2021. "Is Foreign Exchange Risk Priced in Bank Loan Spreads?," Review of Quantitative Finance and Accounting, Springer, vol. 57(3), pages 1061-1092, October.
    10. Fuchs, Fabian U., 2020. "Macroeconomic determinants of foreign exchange rate exposure," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe B-42-20, University of Passau, Faculty of Business and Economics.
    11. 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.
    12. Hoberg, Gerard & Moon, S. Katie, 2017. "Offshore activities and financial vs operational hedging," Journal of Financial Economics, Elsevier, vol. 125(2), pages 217-244.
    13. Francis, Bill B. & Hasan, Iftekhar & Hunter, Delroy M. & Zhu, Yun, 2017. "Do managerial risk-taking incentives influence firms' exchange rate exposure?," Journal of Corporate Finance, Elsevier, vol. 46(C), pages 154-169.
    14. Söhnke M. Bartram & Gordon M. Bodnar, 2007. "The exchange rate exposure puzzle," Managerial Finance, Emerald Group Publishing, vol. 33(9), pages 642-666, August.
    15. Choi, Jongmoo Jay & Jiang, Cao, 2009. "Does multinationality matter? Implications of operational hedging for the exchange risk exposure," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 1973-1982, November.
    16. 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.
    17. Belghitar, Yacine & Clark, Ephraim & Dropsy, Vincent & Mefteh-Wali, Salma, 2021. "The effect of exchange rate fluctuations on the performance of small and medium sized enterprises: Implications for Brexit," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 399-410.
    18. Suparna Chakraborty & Yi Tang & Liuren Wu, 2015. "Imports, Exports, Dollar Exposures, and Stock Returns," Open Economies Review, Springer, vol. 26(5), pages 1059-1079, November.
    19. Bergbrant, Mikael C. & Hunter, Delroy M., 2018. "(How) do credit market conditions affect firms' post-hedging outcomes? Evidence from bank lending standards and firms' currency exposure," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 203-222.
    20. Bartram, Söhnke M., 2019. "Corporate hedging and speculation with derivatives," Journal of Corporate Finance, Elsevier, vol. 57(C), pages 9-34.

    More about this item

    Keywords

    Fair value reporting; SFAS 133; IAS 39; Foreign exchange exposure; Asymmetric foreign exchange exposure;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F39 - International Economics - - International Finance - - - Other
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:riibaf:v:39:y:2017:i:pa:p:215-238. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.elsevier.com/locate/ribaf .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ribaf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.