The value relevance of foreign translation adjustment: Case of Indonesia

This study examines the effect of foreign translation adjustments on firm value. Specifically, this study wants to test the opposite effect of the accounting treatment with economic conditions on foreign translation adjustments. Our sample consists of manufacturing firms listed in Indonesia Stock Exchange year 2006-2011. Multiple regression is used for hypotheses testing. The result shows foreign translation adjustment has value relevance and is negatively associated with stock returns. The negative association between foreign translation adjustment and change in firm value confirms the opposite effect between accounting and economic effect. Appreciation of the local currency and the decrease in operating margins because of high competition with other foreign companies lowers the value of the firms. This negative association between foreign translation adjustment and change in firm value is due mainly to the high-labor-intensive firms. Foreign translation adjustment are significantly negative for high labor intensive firms and insignificant for the low labor intensive firms where labor intensity measured by total employee number. This result implies that wage rigidity in high labor intensive firms is more evident than in the companies with lower labor intensity.