A re-examination of exposure to exchange rate risk: The impact of earnings management and currency derivative usage |
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Authors: | Feng-Yi Chang Chin-Wen Hsin Shin-Rong Shiah-Hou |
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Affiliation: | 1. China University of Technology, College of Management, Faculty of Business Administration, 56, Sec. 3, Xinglong Road, Taipei, Taiwan;2. Yuan Ze University, College of Management, Faculty of Finance, 135 Yuan-Tung Road, Taoyuan, Taiwan |
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Abstract: | In an attempt to explain the weak evidence of priced exchange rate risk, we hypothesize that in addition to currency derivative usages, earnings management serves as another factor contributing to a reduction in exchange rate exposure. Our evidence reveals that earnings management activities, particularly those undertaken for the purpose of income smoothing, significantly reduce firm-specific exchange rate exposure, and that such role is particularly important if appropriate currency derivative instruments are limited. These results complement prior attempts to explain the puzzle of unpriced exchange rate risk. The investigation also highlights the importance of recognizing different managerial purposes behind discretionary accruals. |
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Keywords: | F31 G30 |
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