Management of Accounting Exposure to Currency Changes: Role and Evidence of Agency Costs

Abstract

This paper contends that, contrary to conventional wisdom, it may be rational to manage translation exposure. Accounting procedures for the translation of foreign currency accounts influence the reported income of a multi‐national firm. With non‐zero agency costs, reported income impacts real costs. In such cases, therefore, it may be rational to hedge translation exposure. Empirical evidence of agency costs and the managerial tendency to report higher levels of translated income, based on the early adoption of Financial Accounting Standard No. 52, is presented.

Citation

Aggarwal, R. (1991), "Management of Accounting Exposure to Currency Changes: Role and Evidence of Agency Costs", Managerial Finance, Vol. 17 No. 4, pp. 10-22. https://doi.org/10.1108/eb013676