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Journal Articles Journal of Banking and Finance Year : 2022

Foreign exchange exposure and analysts’ earnings forecasts

Chen Chen
Karen Lai
  • Function : Author
Vic Naiker
  • Function : Author
Jun Wang

Abstract

This study examines how movements in a firm's exposure to foreign exchange (forex) rates affect the properties of analysts' earnings forecasts. Our results suggest that analysts' forecast errors and dispersion increase with an increase in forex exposure within firms. These findings are robust to a wide range of robustness tests, including a quasi-experimental setting based on the sudden unpegging of the U.S. Dollar against the Chinese Yuan. Additional tests reveal that analysts spend more effort forecasting when firms experience an increase in forex exposure. Consistent with an increase in uncertainty of firm outcomes representing the primary channel through which forex exposure affects analysts' forecasts, we find that the effect of forex exposure is heightened in the presence of greater volatility in the U.S. Dollar. However, we also find that more readable annual reports and higher media coverage can help improve the quality of analysts' forecast properties for firms with increasing forex exposure. We also present evidence of some benefits analysts can realize from coverage of high forex exposure firms through generating greater stock trading and securing positions in more prestigious brokerage firms.
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Dates and versions

hal-03895232 , version 1 (27-03-2023)

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Iliyas Yusoff, Chen Chen, Karen Lai, Vic Naiker, Jun Wang. Foreign exchange exposure and analysts’ earnings forecasts. Journal of Banking and Finance, 2022, 146, ⟨10.1016/j.jbankfin.2022.106715⟩. ⟨hal-03895232⟩

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