Thinking Outside the Borders: Investors' Underreaction to Foreign Operations Information
62 Pages Posted: 23 Nov 2011 Last revised: 8 Jan 2019
Date Written: October 1, 2014
Abstract
I use industry-level returns in foreign markets to examine the hypothesis that value-relevant foreign information slowly diffuses into the stock prices of U.S. multinational firms. A trading strategy that exploits foreign information generates abnormal returns of 0.8% monthly. I find that the market responds more slowly in periods with lower media coverage of foreign news and to information from more linguistically and culturally distant countries. These results suggest that both investors’ inattention and lack of understanding of foreign information slow the incorporation of new information into prices. I further separate these two mechanisms by examining market responses
to earnings surprises.
Keywords: market efficiency, limited attention, gradual information diffusion, multinational firms, industry momentum
JEL Classification: G02, G14, G15
Suggested Citation: Suggested Citation
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