Foreign currency translation adjustments as predictors of earning changes

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

Bernard (1993) contends little progress has been made in identifying nonearnings accounting numbers which can predict future changes in income. As a test of the value relevance of foreign currency translation adjustments, this study links year-over-year changes in earnings per share to changes in the value of the cumulative translation adjustment account. The empirical tests are conducted on a sample of 204 U.S. multinational firms for the time period 1991-1996. The sample is derived from firms with subsidiaries in Mexico and Germany. In order to account for the heterogeneity of exchange rate exposure, the sample firms come from a wide range of industrial groupings, have varying sizes and different levels of capital intensity. A panel data set and weighted-least-squares (WLS) are employed to obtain parameter estimates. A major finding of this research is that the lagged value of per-share foreign currency translation adjustments can be used to predict year-over-year changes in earnings per share. The results of the current study also indicate that predictive ability is enhanced when firm specific interaction terms, which control for size, industry, location of direct foreign investment and capital intensity, are included in the estimating equation.

Original languageEnglish
Pages (from-to)51-69
Number of pages19
JournalJournal of International Accounting, Auditing and Taxation
Volume10
Issue number1
DOIs
StatePublished - 1 Mar 2001

Fingerprint

Predictors
Foreign currency
Earnings changes
Capital intensity
Earnings per share
Predictive ability
Foreign capital
Weighted least squares
Interaction terms
Subsidiaries
Industry location
Germany
Income
Direct foreign investment
Value relevance
Grouping
Mexico
Exchange rate exposure
Investment intensity
Multinational firms

Keywords

  • Earnings prediction
  • Foreign currency translation adjustments
  • Nonearnings accounting numbers
  • Value relevance

Cite this

@article{dccdd3cf50e345e0bfdbd9e0f58bcc4f,
title = "Foreign currency translation adjustments as predictors of earning changes",
abstract = "Bernard (1993) contends little progress has been made in identifying nonearnings accounting numbers which can predict future changes in income. As a test of the value relevance of foreign currency translation adjustments, this study links year-over-year changes in earnings per share to changes in the value of the cumulative translation adjustment account. The empirical tests are conducted on a sample of 204 U.S. multinational firms for the time period 1991-1996. The sample is derived from firms with subsidiaries in Mexico and Germany. In order to account for the heterogeneity of exchange rate exposure, the sample firms come from a wide range of industrial groupings, have varying sizes and different levels of capital intensity. A panel data set and weighted-least-squares (WLS) are employed to obtain parameter estimates. A major finding of this research is that the lagged value of per-share foreign currency translation adjustments can be used to predict year-over-year changes in earnings per share. The results of the current study also indicate that predictive ability is enhanced when firm specific interaction terms, which control for size, industry, location of direct foreign investment and capital intensity, are included in the estimating equation.",
keywords = "Earnings prediction, Foreign currency translation adjustments, Nonearnings accounting numbers, Value relevance",
author = "Joann Pinto",
year = "2001",
month = "3",
day = "1",
doi = "10.1016/S1061-9518(01)00035-0",
language = "English",
volume = "10",
pages = "51--69",
journal = "Journal of International Accounting, Auditing and Taxation",
issn = "1061-9518",
publisher = "Elsevier BV",
number = "1",

}

Foreign currency translation adjustments as predictors of earning changes. / Pinto, Joann.

In: Journal of International Accounting, Auditing and Taxation, Vol. 10, No. 1, 01.03.2001, p. 51-69.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Foreign currency translation adjustments as predictors of earning changes

AU - Pinto, Joann

PY - 2001/3/1

Y1 - 2001/3/1

N2 - Bernard (1993) contends little progress has been made in identifying nonearnings accounting numbers which can predict future changes in income. As a test of the value relevance of foreign currency translation adjustments, this study links year-over-year changes in earnings per share to changes in the value of the cumulative translation adjustment account. The empirical tests are conducted on a sample of 204 U.S. multinational firms for the time period 1991-1996. The sample is derived from firms with subsidiaries in Mexico and Germany. In order to account for the heterogeneity of exchange rate exposure, the sample firms come from a wide range of industrial groupings, have varying sizes and different levels of capital intensity. A panel data set and weighted-least-squares (WLS) are employed to obtain parameter estimates. A major finding of this research is that the lagged value of per-share foreign currency translation adjustments can be used to predict year-over-year changes in earnings per share. The results of the current study also indicate that predictive ability is enhanced when firm specific interaction terms, which control for size, industry, location of direct foreign investment and capital intensity, are included in the estimating equation.

AB - Bernard (1993) contends little progress has been made in identifying nonearnings accounting numbers which can predict future changes in income. As a test of the value relevance of foreign currency translation adjustments, this study links year-over-year changes in earnings per share to changes in the value of the cumulative translation adjustment account. The empirical tests are conducted on a sample of 204 U.S. multinational firms for the time period 1991-1996. The sample is derived from firms with subsidiaries in Mexico and Germany. In order to account for the heterogeneity of exchange rate exposure, the sample firms come from a wide range of industrial groupings, have varying sizes and different levels of capital intensity. A panel data set and weighted-least-squares (WLS) are employed to obtain parameter estimates. A major finding of this research is that the lagged value of per-share foreign currency translation adjustments can be used to predict year-over-year changes in earnings per share. The results of the current study also indicate that predictive ability is enhanced when firm specific interaction terms, which control for size, industry, location of direct foreign investment and capital intensity, are included in the estimating equation.

KW - Earnings prediction

KW - Foreign currency translation adjustments

KW - Nonearnings accounting numbers

KW - Value relevance

UR - http://www.scopus.com/inward/record.url?scp=0035285280&partnerID=8YFLogxK

U2 - 10.1016/S1061-9518(01)00035-0

DO - 10.1016/S1061-9518(01)00035-0

M3 - Article

AN - SCOPUS:0035285280

VL - 10

SP - 51

EP - 69

JO - Journal of International Accounting, Auditing and Taxation

JF - Journal of International Accounting, Auditing and Taxation

SN - 1061-9518

IS - 1

ER -