Foreign exchange exposure, risk management, and quarterly earnings announcements

This paper investigates the effects of foreign exchange (FX) exposure and hedging activities on the abnormal stock price volatility surrounding quarterly earnings announcements. The findings show that abnormal volatility is positively correlated with foreign exchange exposure, suggesting that investors use the information in earnings announcements to assess the impact of foreign exchange rate changes on firm performance. Further, abnormal volatility is positively correlated with currency derivatives hedging, but not significantly correlated with the use of foreign denominated debt. This may stem from investors' inability to correctly evaluate information on currency derivatives usage or that investors lack the information needed to correctly judge the effect of derivatives on firm performance. We investigate whether abnormal volatility on earnings announcement days for firms with foreign exchange exposure might be caused by systematic mispricing, but find no evidence for this.