Usefulness of required quantitative disclosures under foreign currency translation standards: An empirical examination

This study examines the capital market effects of the specific disclosures of translation gains and losses required under SFAS 8 and its successor SFAS 52. Corporate management opposition to SFAS 8 on the grounds that the inclusion of translation gains and losses in income would adversely affect the prices of their stocks were instrumental in the replacement of SFAS 8 by 52. Drawing on the efficient market and information content theories, the case is made for both positive and negative effects from the requirements. Hypotheses are then developed and tested for the information in the disclosures. In contrast to previous studies, expectation for translation gains and losses are introduced. The earlier of the receipt of the 10-K or the annual report at the Securities and Exchange Commission is used as the event date, following recent studies that recognize that detailed information in financial statements are usually not made available at the earnings announcement date. Results indicate a negative but insignificant reaction to the disclosures under SFAS 8. Useful information is found in the SFAS 52 disclosures although the direction of the effects are not consistent with each expectation model. The results from a test to determine if the economic exposure effects of exchange risks are immediately impounded before the accounting information is known did not show the returns of multinational corporations significantly different from the returns of a control sample of domestic firms during periods of sharp exchange rate changes. The study contributes to the literature by finding first an empirical no answer to the adverse effects concerns generated by the required inclusion of translation gains and losses in income under SFAS 8 and second, support that useful information will be used by the market, regardless of where it is included in the financial statements. The absence of an a priori best expectation model for expected translation gains and losses detracts from the results