A cross-sectional analysis of firms' contractual structure changes in response to ASRB1012: foreign currency translation

Evans, John. (1991). A cross-sectional analysis of firms' contractual structure changes in response to ASRB1012: foreign currency translation Honours Thesis, Dept. of Commerce, University of Queensland.

       
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Author Evans, John.
Thesis Title A cross-sectional analysis of firms' contractual structure changes in response to ASRB1012: foreign currency translation
School, Centre or Institute Dept. of Commerce
Institution University of Queensland
Publication date 1991
Thesis type Honours Thesis
Total pages 119
Language eng
Subjects 14 Economics
Formatted abstract This thesis examines the impact of the approved accounting standard ASRB 1012: Foreign Currency Translation on firms with overseas subsidiaries and/or foreign currency long-term monetary items at the time of its introduction. It tests firms' reactions to the standard. In order to explain and predict the reactions, the contracting framework is adopted and the firm is viewed as having an optimal set of contracts in place prior to the standard.

The thesis differs from previous studies by testing both specific types of contractual structure changes and cross-sectional explanations of the changes. The results indicate that firms which were forced to change their accounting policies to comply with the standard decreased their foreign currency long-term debt and increased their levels of direct hedging activity after the standard was introduced. The extent of the reduction in foreign debt was associated with the level of interest coverage, the size of the firm, whether the firm derived foreign exposure through earnings or assets and, to a limited extent, the degree of foreign exposure. The results are consistent with contracting theory, but are inconsistent with political cost arguments. The decision to increase direct hedging activity was also associated with the type of foreign exposure. There was no evidence to indicate that firms reduced their investment in overseas subsidiaries.

In summary, the thesis provides evidence that to use sub-optimal accounting techniques imposes sufficient costs that firms undertake costly contractual structure changes to mitigate those costs and to revert to contractual equilibria.


 
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Created: Thu, 21 Oct 2010, 09:05:09 EST by Ning Jing on behalf of The University of Queensland Library