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Professor Alan D. Jagolinzer
Professor of Financial Accounting
Accounting Faculty Administrative Subject Group Head
University of Cambridge, Judge Business School

Managers can choose the currency that is used for presentation of their financial statements, even though this choice has no effect on the real exchange risk underlying their actual transactions. The choice of reporting currency, however, can affect reported levels, trends and volatility of both earnings and cash flows. Because the reporting currency choice is largely cosmetic, we are interested in understanding whether firms strategically switch reporting currency and what this choice might signal about firm performance. We identify a sample of North American firms that switch reporting currency between Canadian and U.S. dollars, even when the underlying functional currency remains the same. We find evidence that the firm’s decision to switch reporting currency is predictably associated with a perceived longer-term increase in the proportion of foreign sales transactions, which introduces a real increase in foreign currency exchange risk. The reporting currency switch, however, appears to strategically mask this incremental exchange risk. Evidence indicates that reported earnings and cash flow volatility is lower after the reporting currency change when compared to the underlying real volatility.