Unraveling Exchange Rate Exposure

Abstract

Theoretical models predict substantial firm value exposure to exchange rate movements. However, empirical papers find little to no exchange rate exposure. This paper examines whether the quality of segment reporting is a key driver of such (puzzling) low exchange rate exposure. Using the adoption of SFAS 131 as a quasi-natural experiment, I find that firms that are forced to disclose disaggregated business segment reports exhibit a significant change in their exchange rate exposure. The uncovered exposure is on average negative and economically significant. Post-SFAS 131, analysts better incorporate past currency news onto their forecasts and affected firms increase financial hedging, suggesting that disclosure has real effects.