Informational relevance of foreign currency transaction gains and losses for valuation purpose

Abstract

Some argue that current accounting standards which require foreign currency transaction gains and losses to be included in net income create unnecessary volatility of net income. Empirical results using Korean data show that foreign currency transaction gains and losses exhibit the attributes related to transitory earnings with less information relevance for purposes of forecasting and valuation. Also, empirical analysis does not find the significant relationships between the transitory earnings attributes, which is not consistent with the prediction from the analytical model. It can be inferred from this evidence that the information relevance of foreign currency transaction gains and losses is not significantly different cross-sectionally across the firms. Additional test also reveals that the information relevance does not vary in the cross-section with a firms stock return sensitivity to the foreign exchange rate change. These results suggest that the informational irrelevancy of foreign currency transaction gains and losses are not conditional on the extent to which a firm is affected by exchange rate changes.