Translation exposure and firm value, evidence from Australian multinational corporations

Abstract

The purpose of this study is to analyse the economic effect of foreign currency translation adjustments and to investigate the relationship between these adjustments and firm value, for a sample of 181 Australian multinational corporations, with foreign subsidiaries concentrated in three specific geographical regions (Asia, Europe and NAFTA). The study is based on collected data for the five-year period from 2000 to 2004, and uses a two-stage market model methodology, resulting in the implementation of a cross-sectional time series model to test for the affect of translation differences on computed excess returns. The study finds that translation adjustments in income statements and in shareholders' equity are significantly related to excess returns. These results are consistent with accounting exposure being contributory to firm value.