A Test of the Market’s Mispricing of Domestic and Foreign Earnings

Abstract:     
This study investigates whether abnormal returns can be earned using public information about firms' domestic and foreign earnings. The results indicate that the market understates foreign earnings’ persistence. As a result, it is possible to construct a zero-investment hedge portfolio that consistently earns positive returns across years. A disproportionate fraction of the positive abnormal returns to the long position is concentrated in the few days surrounding the subsequent year's quarterly earnings announcement dates. Furthermore, the abnormal returns do not appear to persist beyond the subsequent year. The results are consistent with market mispricing, and not mis-estimated risk.

Number of Pages in PDF File: 38

Keywords: Capital markets, Market efficiency, Valuation, Multinational firms, Foreign earnings

JEL Classification: F23, G14, M41

working papers series