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

Authors:
  • EBEli Bartov
    Eli Bartov
  • GBGordon M. Bodnar
    Gordon M. Bodnar
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Abstract
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.