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The particular accounting controversy considered in this paper relates to foreign currency accounting for U.S. multinational companies and the meth- ods for measuring and reporting translation gains (losses) under Statement of Financial Accounting Standards (SFAS) No. 8 and under SFAS No. 52. Following its issuance, SFAS No. 8 was severely criticized for introducing arti- ficial variability (i.e., noise) into reported earnings and for producing reported results that were frequently inconsistent with economic reality.^ Interestingly, the Financial Accounting Standards Board (FASB) itself apparently con- curred with this assessment, noting in SFAS No. 52 (Appendix C, par. 63) that "SFAS No. 8 has produced results that the Board and many constituents believe do not reflect the underlying economic reality of many foreign opera- tions and thereby produces results that are not relevant."
The rules for measuring and reporting translation gains (losses) were sub- stantially modified under SFAS No. 52. Many believed that these changes sig- nificantly improved the quality of the reported earnings figures of multina- tional companies (Griffin and Castanias 1987). However, Beaver and Wolfson (1982) argue that this conclusion may be unwarranted, particularly when the translation gain/loss is excluded from income.
This study tests assertions about the relative quality of earnings signals under SFAS No. 8 and SFAS No. 52 by comparing the amount of price response to earnings surprises for a set of multinational and a set of domestic corporations during the SFAS No. 8 and 52 periods. Consistent with alleged deficiencies of income determination under SFAS No. 8, the study finds weak evidence that the relative price adjustment for a given amount of unexpected earnings was smaller for multinational firms than for nonmultinationals during the SFAS No. 8 period. This result is consistent with multinational firms pro- ducing lower-quality eamings signals during the SFAS No. 8 period than didtheir nonmultinational counterparts. However, several indirect measures sug- gest that there was greater prior probability uncertainty associated with the future cash flows or dividends of the nonmultinational sample during this time frame. Accordingly, this cannot be ruled out as a competing explanation for the observed differences in the markets' response to earnings signals during the SFAS No. 8 period.
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