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A re-examination of exposure to exchange rate risk: The impact of earnings management and currency derivative usage

Feng-Yi Chang, Chin-Wen Hsin and Shiah-Hou, Shin-Rong

Journal of Banking & Finance, 2013, vol. 37, issue 8, 3243-3257

Abstract: In an attempt to explain the weak evidence of priced exchange rate risk, we hypothesize that in addition to currency derivative usages, earnings management serves as another factor contributing to a reduction in exchange rate exposure. Our evidence reveals that earnings management activities, particularly those undertaken for the purpose of income smoothing, significantly reduce firm-specific exchange rate exposure, and that such role is particularly important if appropriate currency derivative instruments are limited. These results complement prior attempts to explain the puzzle of unpriced exchange rate risk. The investigation also highlights the importance of recognizing different managerial purposes behind discretionary accruals.

Keywords: Currency derivatives; Earnings management; Exchange rate risk exposure; Hedging (search for similar items in EconPapers)
JEL-codes: F31 G30 (search for similar items in EconPapers)
Date: 2013
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Handle: RePEc:eee:jbfina:v:37:y:2013:i:8:p:3243-3257