Does foreign exchange risk matter to equity research analysts when forecasting stock prices? Evidence from U.S. firms

Abstract

We study the relationship between the foreign exchange risk and analyst target price forecast error using U.S. firm-level data for the sample period between 1999 and 2014. We find that the target price forecast error is higher when foreign exchange risk is higher. The relationship is stronger for smaller firms and less pronounced among financial firms. Collectively, the findings suggest that analysts make fewer errors when forecasting for firms that are more capable of managing foreign exchange risks. These findings imply that either analyst does not make a significant effort in incorporating foreign exchange risk into their forecast models, or they do not have the skills for that task.