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Good News and Bad News about Firm-Level Stock Returns of Internationally Exposed Firms

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  • Carmelo Giaccotto
  • Alain Krapl

Abstract

We examine stock returns of firms with international exposure. Our empirical work relies on Campbell'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

Suggested Citation

  • Carmelo Giaccotto & Alain Krapl, 2014. "Good News and Bad News about Firm-Level Stock Returns of Internationally Exposed Firms," International Review of Finance, International Review of Finance Ltd., vol. 14(4), pages 523-550, December.
    • Handle: RePEc:bla:irvfin:v:14:y:2014:i:4:p:523-550
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    File URL: http://hdl.handle.net/10.1111/irfi.12033
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    Cited by:

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    3. Krapl, Alain & O'Brien, Thomas J., 2015. "Direct versus indirect regression estimates of foreign exchange cash flow exposure," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 103-112.

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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