Proposed Accounting Model for Evaluating the Financial Impact of Foreign Exchange Rate Changes on Stock Returns and Prices Using Event Study Methodology: An Applied Study on Companies Listed on the Egyptian Stock Exchange

The primary objective of this research was to study and analyze the accounting treatment of foreign exchange rate changes. This involved focusing on the objective principles for recognizing exchange rate differences, developing accurate models for measuring them, and establishing effective disclosure mechanisms within financial reports, all in light of the provisions of the International Accounting Standards (IAS 21: 29) and the Egyptian Accounting Standard No. 13, along with its recent amendments. Additionally, the research aimed to propose a model for evaluating the financial impact of foreign exchange rate changes on the returns and stock prices of companies listed on the Egyptian Stock Exchange using the Event Study methodology.
The researcher conducted an applied study on a sample of 178 companies listed on the Egyptian Stock Exchange, with 65,320 daily observations over 367 trading days, spanning from January 2, 2023, to July 31, 2024. The study period included both pre-event and post-event periods surrounding the Central Bank of Egypt's decision to float the exchange rate on March 6, 2024. To measure and evaluate the financial impact of foreign exchange rate changes on stock returns and prices, the researcher used the Event Study methodology, along with a set of statistical methods via SPSS.
The research yielded several theoretical insights, most significant of which is that foreign exchange rate changes, regardless of their forms and sources, represent significant risks that cannot be ignored. These changes primarily affect net cash flows and company profits, and secondarily influence the market value of stock prices and their returns. These risks are associated with three main types: economic (operational) risk, translation risk, and transaction risk, all of which collectively affect the accuracy and reliability of the values presented in financial statements.
The applied study revealed several key findings, including a significant impact of foreign exchange rate changes across various sectors in the Egyptian financial market on stock returns, with an R² coefficient of 0.168, and on the market value of stock prices, with an R² coefficient of 0.136. The study also found a statistically significant negative impact when evaluating the financial effects of foreign exchange rate changes on stock returns using the Event Study, with an average cumulative abnormal return (CAR) of -28.317, and a negative impact on the market value of stock prices using the Event Study, with an average cumulative abnormal return (CAR) of -393.711. Additionally, there was a statistically significant differentiation between the sectors of the Egyptian financial market in terms of the impact on stock returns and the market value of stock prices due to the financial effects of exchange rate changes during the studied event periods (-30 days before the event, event day 0, +30 days after the event). Finally, the Event Study analysis using windows of (0: +5), (0: +10), (0: +15), (0: +20), (0: +25), and (0: +30) revealed a progressively increasing negative effect over 30 days following the event of floating the foreign exchange rate on the returns and prices of stocks of companies listed on the Egyptian Stock Exchange.