AN EMPIRICAL STUDY OF THE MARKET REACTION TO STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 52: 'FOREIGN CURRENCY TRANSLATION'

This study investigates the market reaction to Statement of Financial Accounting Standards No. 52. (FASB No. 52), Foreign Currency Translation. FASB No. 52 changes the manner of accounting for foreign currency translation from that specified in FASB No. 8. It is postulated that the stock prices of multinational corporation (MNCs) would be favorably changed by the release of FASB No. 52, since the accounting change caused by FASB No. 52 would change the foreign currency risk management practices of MNC's.;The results of the first test showed that the price changes during the entire period including four event dates were not significant. However, an additional test which excluded the WSJ report date showed that there were significant positive price changes. The results of the second set of tests showed that during the period of the Exposure Draft, there were significant positive price changes and that during the period of the revised Exposure Draft, there were significant negative price changes. During the periods of the WSJ report date and the issuance of FASB No. 52, there were no significant price changes.;In addition to the price reaction test, a trading activity test was performed using the same market model as was employed for the price reaction test. The results of the trading activity test showed that there were significant positive trading volume reactions during the periods of the WSJ report date and the Exposure Draft. However, during the periods of the revised Exposure Draft and the issuance of FASB No. 52, there were no significant trading volume reactions.;In this study, tests were performed for the periods of four event dates: the WSJ report date, the Exposure Draft date, the revised Exposure Draft date, and the issuance of FASB No. 52. Tests were performed in two ways. First, the entire period was tested, including all four events and then including only three events excluding the WSJ report date. Second, the period of each event date was tested separately. The test period consists of 13 weeks based on each event date. For the first test, CAPM was employed using monthly return data in order to examine significant price changes of MNCs. For the second test, the market model was employed using weekly return data. The sample size consisted of 425 MNCs.