Mohammad S. Bazaz

Value Relevance of Unrealized Foreign Currency Translation Gains and Losses

This study uses an equity valuation model to investigate the extent to which SFAS No. 52 unrealized foreign currency translation gains and losses are reflected in levels of equity security prices. Equity security price is used as the dependent variable in our selected model. Book value of equity (adjusted for the cumulative translation gain or loss), earnings, and cumulative translation gains and losses are used as independent variables. Our results indicate that, generally, translation gains and losses are valued, but losses have a greater impact than gains and the value seems to change over time in setting the levels of equity share prices of USbased MNCs. On a pooled basis, the results are clearly statistically significant, although the statistical significance of the results appears to vary with the annual time period examined. Our results are consistent with the SFAS No. 52 intention that these gains and losses be treated as unrealized as the net exposure is considered long‐term in nature for foreign currency functional currency subsidiaries. Our results appear consistent with extant literature suggesting that unrealized foreign currency translation gains and losses are directly valued ‐ although not dollar for dollar ‐ in a manner similar to earnings (i.e., unrealized gains are associated with positive equity returns and unrealized losses are associated with negative equity returns).

Tests of the incremental explanatory power of auditor qualified opinion and audit firm changes in predicting impending bankruptcy

This paper investigates the incremental explanatory power of auditor-qualified opinions and auditor changes in log-linear logistic regression prediction of impending bankruptcy. We find that auditor-qualified opinions and auditor changes, both individually and jointly, provide incremental explanatory power beyond that conveyed by traditional financial ratios in predicting impending bankruptcy. The result of this study supports our prior expectations that failing firms are leaning toward changing auditors more than do healthier firms. Our findings offer compelling evidence that auditor changes provide incremental explanatory power in predicting impending firm failure beyond what is conveyed by joint consideration of auditor-qualified opinions and traditional financial statement ratios.

The differential effect of directional unexpected earnings and post-earnings announcement drift behaviour

This research investigates whether the post-earnings announcement equity security price return drift is monotonic but (1) at a different rate than at the time of the earnings announcement, and (2) at different rates for positive unexpected earnings and negative unexpected earnings. Our results indicate that the post-earnings announcement equity security price return drift amplifies the equity security return reaction at the time of the earnings announcement for negative earnings changes. However, post-earnings announcement equity security price return drift reverses the equity security return reaction at the time of the earnings announcement for positive unexpected earnings. Implications of our research results for equity security return drift, reversal, and volatility are that equity security prices under-react at the time of the earnings announcement to negative unexpected earnings and over-react at the time of the earnings announcement to positive unexpected earnings.

ASSESSING CURRENCY EXCHANGE RATE EXPOSURE USING GEOGRAPHIC SEGMENT DISCLOSURES: THE IMPORTANCE OF CURRENCY-SPECIFIC TYPE AND DEGREE OF EXPOSURE

Abstract This study provides descriptive evidence regarding the investors’ assessment of the currency exchange rate exposure of U.S.-based multinational enterprises. We match sample firms’ equity security returns with currency-specific exchange rate changes using their SFAS No. 14 geographic segment disclosures. Unique from prior research, we use a firm-specific longitudinal approach which allows the type and amount of currency-specific to vary. We document ample evidence of currency exchange rate exposure significantly different from zero at conventional confidence levels. Particularly, when grouped according to type of exposure (i.e. positive or negative) and in absolute value we find significant currency exposure for every currency examined. We use our results to illustrate the impact of firms natural hedging on obscuring associations between firms’ equity security returns and currency exchange rate changes and conjecture natural hedging as one explanation for modest results in extant literature.