Foreign currency translation and analyst forecast dispersion: Examining the effects of statement of financial accounting standards no. 52

Abstract

Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation (1981), amended the accounting procedures for foreign currency statements by requiring the exclusion from income of most foreign currency translation adjustments. As a result, the earnings of affected multinationals were expected to become less volatile. This expectation is used in the present study to form a hypothesis that the adoption of SFAS No. 52 led to a reduction in the level of disagreement, known as forecast dispersion, among financial analysts in their forecasts of earnings. Forecast dispersion is considered to be a relevant measure of firm risk and has also been linked to stock trading volume. In detecting a reduction in dispersion associated with the adoption of SFAS No. 52, the present study indicates that an economic consequence was associated with the adoption of the accounting standard. The results and implications should be of particular interest to accounting policy makers as an insight into the effects of SFAS No. 52 on affected firms is provided. Financial analysts and market participants should also find the study to be of interest because it provides a better understanding as to why earnings forecasts may differ, potentially leading to a reduction in those differences and enhanced confidence in earnings forecast data.