An empirical investigation of the effects of the accounting treatment of foreign currency translation on management actions in multinational firms

This empirical study of an accounting event explores the implications of possible reactions on the part of managers to an accounting standards change. Either a positive or negative reaction would be inconsistent with the assumption that managers do not change real practices to conform with accounting standards. Phase one is a traditional market model event study of the reaction in stock market prices due to an accounting standards change. Several potential "event dates" are analyzed. The results of this phase show a negative stock market reaction to the revised exposure draft. Phase two describes a multi-factor market model which includes common international factors. Phase three focuses on residual analysis derived from the phase two model. Evidence from phase three shows that firm management has not modified internal factors as agency theory, in the presence of asymmetric information, predicts. In particular, actions necessary to alter the functional currency of an entity are not discernible. Modifications for differential industry responses are explored. A field study of hedging practices and anecdotal evidence regarding the confusion surrounding SFAS No. 52 similarly contribute to an understanding of the implications of the change in accounting standards.