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

Consistent with previous research, the authors fail to find a significant correlation between the abnormal returns of their sample firms with international activities and changes in the dollar. They 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 the authors' sample firms, suggesting that misprizing 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. Copyright 1994 by American Finance Association.

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