Digesting FOREXS

We provide novel evidence that equity investors react to currency shocks with a delay. Using the cross-section of currency returns and the relative presence of U.S. multinational firms in foreign economies, we compute a foreign operations related exchange shock (FOREXS) measure. We find FOREXS to predict firms' future cash flows and stock returns, driving much of the previously documented underreaction to foreign information. A strategy that buys stocks with high FOREXS and shorts stocks with low FOREXS yields a 6.74% annualized abnormal return. We show that the predictive power comes from incomplete hedging by the firms and limited attention by the investors. Our results thus highlight the important role of investor attention in facilitating information transmission across asset classes