Can an MNC Reduce the Impact of Translation Exposure by Communicating?
Point Yes. Investors commonly use earnings to derive an MNC’s expected future cash flows. Investors do not necessarily recognize how an MNC’s translation exposure could distort their estimates of the MNC’s future cash flows. Therefore, the MNC could clearly communicate in its annual report and elsewhere how the earnings were affected by translation gains and losses in any period. If investors have this information, they will not overreact to earnings changes that are primarily attributed to translation exposure.
Counter-Point No. Investors focus on the bottom line and should ignore any communication regarding the translation exposure. Moreover, they may believe that translation exposure should be accounted for anyway. If foreign earnings are reduced because of a weak currency, the earnings may continue to be weak if the currency remains weak.
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