Abstract

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

Wayne B. Thomas
University of Oklahoma - Michael F. Price College of Business

Journal of Accounting and Economics, Vol. 28, No. 3, 1999, 243-267.

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.

Key words: Capital markets; Market efficiency; Valuation; Multinational firms; Foreign earnings; Mishkin model

JEL Classifications: F23, G14, M41

Accepted Paper Series

Date posted: March 21, 2002 ; Last revised: March 21, 2002

Suggested Citation

Thomas, Wayne B., A Test of the Market's Mispricing of Domestic and Foreign Earnings. Journal of Accounting and Economics, Vol. 28, No. 3, 1999, 243-267.. Available at SSRN: http://ssrn.com/abstract=304862

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Contact Information

Wayne B. Thomas (Contact Author)

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States
405-325-5789 (Phone)
405-325-7348 (Fax)