Corporate Value, Corporate Earnings and Exchange Rates: An Analysis of the Eurozone

Abstract

This study examines the impact of the introduction of the common currency on the value of European firms. In general, the introduction of the euro appears to have influenced the valuation of Eurozone companies. In particular, based on estimates using an adapted residual earnings model and observed equity prices in the period both before and after currency convergence, it is shown that an appreciation of the exchange rate had greater positive effects on the value of Eurozone companies in the pre-euro period than post-euro. The robustness of these findings is demonstrated in the paper using panel methods that allow for cross-sectional and time-series dependencies, thus extending the research method beyond the pooled regression approach that has been adopted to date in most published applications of the Ohlson accounting-based valuation model. It is also shown that, in general, multinational Eurozone companies, like their counterparts in the US, are affected adversely by changes in the exchange rate. Overall, the conclusions of this study are relevant both for policy makers and investors in the effort to assess the factors affecting the market value of European firms.