The Value Relevance of Foreign Currency Translation Adjustments (FCTAs) in the Italian Stock Exchange

The main aim of this paper is to test whether the foreign currency translation adjustments (FCTAs), the largestcomponents of other comprehensive income (OCI) for most firms, are incrementally value-relevant for investorswith respect to the net income (NI). Previous archival research on the value relevance of FCTAs has documented aweak or non-existent link between FCTAs and firm valuation (Pinto, 2005). The hypothesized reasons could residein the econometric method employed, in the use of as-if numbers, and in the missing consideration of thedifferential effect that exchange rate changes have on firms of varying levels of capital intensiveness. This studyadds to the existing literature by empirically testing the value relevance of as-reported FCTAs numbers in theearnings and book value model the Ohlson-like interacted model through panel data techniques. The main findingof this study is that as-reported FCTAs are significantly and incrementally value-relevant, when their parameterestimates are allowed to vary in the cross-section.