Geographic Momentum

45 Pages Posted: 15 Mar 2012 Last revised: 16 Aug 2012

Date Written: March 14, 2012

Abstract

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, firms with less analyst coverage, firms with 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.

Keywords: geographic segments, momentum, inattention, market inefficiency

JEL Classification: G10, G11, G14

Suggested Citation

Nguyen, Quoc, Geographic Momentum (March 14, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2022724 or http://dx.doi.org/10.2139/ssrn.2022724

Quoc Nguyen (Contact Author)

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States

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