The Value Relevance of Foreign Currency Translation Adjustments in the Italian Stock Exchange

The main aim of the article is to test whether the Foreign Currency Translation Adjustments (FCTA), the largest components of Other Comprehensive Income (OCI) for most firms (Dee, 1999), is incrementally value relevant for investors with respect to net income. Previous archival research on value relevance of OCI and its components pointed out that one of the main reasons of the lack of significance in OCI value relevance studies lies in the use of the as-if OCI numbers (i.e. not reported OCI numbers) that could have led to significant measurement errors and a lack of information transparency. As regards the specific literature review on FCTA value relevance, empirical evidence presented in both the finance and accounting literatures has documented either a weak or non-existent link between foreign exchange rate movements and firm valuation (Pinto, 2005). The hypothesized reasons could reside in the appropriateness of the econometric method employed, in the use of as-if FCTA numbers, in the consideration that the extant empirical research, with exception of Pinto (2005) has not allowed for a firm-level variation in asset composition. This study adds to the existing literature by empirically testing the value relevance of as-reported FCTA numbers in an earnings and book value model Ohlson-like interacted model through panel data techniques, that allows to take into consideration individual heterogeneity of companies. The sample is constituted by all non-financial listed companies to the Milan Stock Exchange for the 2008-2009 two-year period. The main finding of this study is that as reported FCTA are significantly incrementally value relevant when their parameter estimates are allowed to vary in the cross-section