Can an MNC Reduce the Impact of Translation Exposure by Communicating?

POINT: Yes. Investors commonly use earnings to derive an MNCs expected future cash flows. Investors do not necessarily recognize how an MNCs translation exposure could distort their estimates of the MNCs 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 to 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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