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This study uses the SFAS No.52 functional currency designation as a proxy for the varying economic content of Temporal Method translation gains and losses to refine tests of the market reaction to SFAS No.8 and subsequent foreign currency translation policy events. We observe that dollar functional currency MNEs having by definition a relatively greater degree of short-term cash flow exposure are more negatively impacted by accounting policy events beginning with the SFAS No.8 Exposure Draft and extending through the SFAS No.52 Exposure Draft than are local currency functional currency firms having by definition a relatively lesser degree of short-term currency exposure. Our results are consistent with intuition suggesting that local currency functional currency firms are negatively impacted only by the adverse earnings implications of largely unrealized translation gains and losses induced by SFAS No.8; a condition subsequently alleviated by SFAS No.52. Dollar functional currency firms, on the other hand, are negatively impacted by the earnings effects of floating exchange rates on near-term entity cash flows and the largely realized translation gains or losses taken to income under SFAS No.8; a condition unchanged by SFAS No.52. We conclude that investors did discern the differential degree of MNEs currency exposure relative to the Temporal Method, and that the SFAS No.52 functional currency designation was a relatively important source of information concerning the assessment of the exchange rate exposure of the U.S.-based MNEs.

The Market Reaction Associated With SFAS No.8 And SFAS No.52: Did Investors Recognize Differential Economic Content Of Translation Gains And Losses?