Premium
Good News and Bad News about Firm‐Level Stock Returns of Internationally Exposed Firms
Author(s) -
Giaccotto Carmelo,
Krapl Alain
Publication year - 2014
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/irfi.12033
Subject(s) - cash flow , stock (firearms) , volatility (finance) , economics , econometrics , covariance , monetary economics , financial economics , variance (accounting) , business , accounting , statistics , mathematics , mechanical engineering , engineering
We examine stock returns of firms with international exposure. Our empirical work relies on C ampbell's variance decomposition framework. Not surprisingly, we find that the volatility of discount rate and cash flow news increase with the degree of international exposure. As firms globalize, the cash flow effect is good news, while the discount rate effect amounts to bad news. The surprising result is that the covariance between the news terms increases with international exposure. This finding provides indirect evidence for the proposition that foreign exchange ( FX ) risk is a priced factor in the cross‐section of risk‐adjusted expected returns. JEL Classifications: G12, G15; EFM Classification Code: 330