Firm Valuation, Earnings Expectations, and the Exchange-Rate Exposure Effect




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    • Bartov is from the Leonard N. Stern School of Business, New York University, and Bodnar is from The Wharton School, University of Pennsylvania. We thank Yakov Amihud, Ray Ball, Jim Brickley, Doug Cerf, Dave Fiedler, Bill Gentry, John Hand, Trevor Harris, Richard Leftwich, Jim Ohlson, Jay Shanken, Cliff Smith, Theodore Sougiannis, René Stulz (the editor), Ross Watts, Jerry Zimmerman, Mark Zmijewski, and two anonymous referees for their comments. We also acknowledge comments from participants in the 1991 Semi-Annual Cornell-Rochester Finance Seminar, the National Bureau of Economic Research 1992 Summer Institute, and workshops at the following universities: University of Chicago, Columbia University, New York University (Stern School of Business), University of Pennsylvania (Wharton School), State University of New York at Buffalo, and University of Toronto. This work has also been presented at the 1994 annual meeting of the American Finance Association. We acknowledge the John M. Olin Foundation for financial assistance and IBES Incorporated for providing the IBES tape.


Consistent with previous research, we fail to find a significant correlation between the abnormal returns of our sample firms with international activities and changes in the dollar. We investigate the possibility that this failure is due to mispricing. Lagged changes in the dollar are a significant variable in explaining current abnormal returns of our sample firms, suggesting that mispricing does occur. A simple trading strategy based upon these results generates significant abnormal returns. Corroborating evidence from returns around earnings announcements as well as errors in analysts' forecasts of earnings is also provided.