[Previous research has demonstrated that information asymmetry translates into higher transaction costs for trading shares of the firm which, in turn, raise the required rate of return and lower current stock price. The information asymmetry perspective suggests that, ceteris paribus, managers wishing to maximize the value of their firms have incentives to reduce the degree of information asymmetry by switching to newly available accounting techniques which make financial statements more informative to investors. Firms with greater information asymmetry are predicted to be more likely to switch to more informative accounting methods when they become available. Tests on the choice of functional currency among U.S. multinational firms support these predictions after controlling for variables such as the debt-equity ratio, interest coverage, size, and the relative size of the foreign currency adjustment in the financial statement.]

Studies the information asymmetry perspective of corporate accounting choice. Effects of information asymmetry to transaction costs and liquidity for trading shares; Disclosure opportunity to decrease information asymmetry; Information asymmetry in the choice of functional currency by multinational firms.

We examine the relation between exchange rate variability and stock return volatility for U.S. multinational firms and decompose this relation into components of systematic and diversifiable risk. Focusing on two five-year periods around the 1973 switch from fixed to floating exchange rates, we find a significant increase in volatility of monthly stock returns corresponding to the period of increased exchange rate variability, even relative to the increase in stock return volatility for three control samples. In conjunction with this increase in total volatility there is also an increase in market risk (beta) for multinational firms.