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Geographic Momentum

Quoc H. Nguyen

University of Illinois at Chicago - Department of Finance

May 2, 2012

Do investors pay attention to foreign market conditions when they evaluate multinational corporations? Using geographic segment disclosures by US multinational companies, I find that stock prices do not promptly incorporate information regarding changes in foreign market conditions. This, in turn, generates return predictability in the cross-section of firms with foreign operations. A simple trading strategy that exploits geographic information yields risk-adjusted return of 135 basis points per month, or 16.2% per year. The predictability cannot be explained by firm's own momentum, industry momentum, post-earnings-announcement drift, being a conglomerate, or exposure to emerging market risk. Consistent with the investor inattention hypothesis, I further document that smaller firms, as well as firms with less analyst coverage, lower institutional holdings, or more complex foreign sales compositions exhibit stronger return predictability. This paper is the first to document the predictable link between foreign country-level indices returns and US firm-level stock returns, and adds to the growing literature concerning the role of investor inattention and firm complexity in price formation.

Number of Pages in PDF File: 45

Keywords: Geographic Segments, Momentum, Inattention, Market Inefficiency

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Date posted: September 3, 2011 ; Last revised: May 12, 2012

Suggested Citation

Nguyen, Quoc H., Geographic Momentum (May 2, 2012). Available at SSRN: https://ssrn.com/abstract=1921537 or http://dx.doi.org/10.2139/ssrn.1921537

Contact Information

Quoc H. Nguyen (Contact Author)
University of Illinois at Chicago - Department of Finance ( email )
2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
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