FASB Statement 52 and Multinational Corporations' Hedging and Debt Denomination Decisions

Abstract

This study examines the effects of the Statement of Financial Accounting Standards (SFAS) No. 52 on hedging and debt denomination decisions of multinational corporations (MNCs). Specifically, executives of MNCs and users of MNC financial statements were asked questions regarding two issues: 1. What are the effects of SFAS No. 52 on the hedging activities of MNCs? and 2. Has SPAS No. 52 affected decisions regarding debt denomination of MNCs? Two major conclusions can be drawn from the research: (1) Accounting exposure hedging continues to be prevalent. SFAS No. 52 does not appear to have discontinued or decreased hedging of accounting exposure in MNCs, and (2) SFAS No. 52 seems to have caused a shift between some MNCs' U.S. dollar debt and local currency debt. Prior research on the hedging activities of MNCs has provided inconsistent results. This study documents evidence which implies that MNCs' executives (MNCEs) and certified financial analysts (CFAs) who follow MNCs do not report/believe that accounting exposure hedging activities decreased in all cases. Specifically, when the local currency is the functional currency, both groups responded that this form of hedging has continued. Results regarding these activities are contrary to research expectations. SPAS No. 52 does not appear to have solved all issues of accounting vs. economic exposure. Results of the present study indicate that SFAS No. 52 has not decreased the hedging of accounting exposure for local-functional-currency subsidiaries. Whether a company participates in hedging activities or not may be due more to corporate practices and policies than to accounting requirements. In other words, hedging may well be a practice or policy of MNCs regardless of the accounting requirements. In addition, prior research provided limited evidence that SPAS No. 52 might have affected MNCs' choices in which debt was denominated. The MNCEs surveyed in this study report a significant effect of SPAS No. 52 on the U.S. dollar debt and the local or other currency debt of their own company. The findings provide support for the contention that SPAS No. 52 does impact financing decisions of MNCs.