Gradual Information Diffusion in the Stock Market: Evidence from U.S. Multinational Firms

59 Pages Posted: 16 Mar 2012 Last revised: 19 Nov 2012

See all articles by Xing Huang

Xing Huang

Washington University in St. Louis - Olin Business School

Date Written: November 2012

Abstract

Using the corresponding industry return in the foreign countries, I show that the foreign operations information of multinational firms is slowly incorporated into stock prices. A trading strategy based on this effect generates an abnormal return of approximately 0.8% per month, or 9.6% per year, controlling for risk-based factors. The return predictability is not driven by U.S. industry momentum, global industry momentum or foreign country-specific industry momentum. The predictability becomes more pronounced for smaller and more opaque firms, and firms with lower fraction of foreign operations and more geographic segments. I also find that stock prices respond more to foreign operations information around quarterly earnings announcements or when there is more foreign news relative to domestic news appearing in the media. In addition, information about firms’ operations in Asia is delayed more than information about operations in Europe and English-speaking countries. These results are consistent with the hypothesis that news about multinational firms’ foreign operations diffuses gradually, indicating investors’ limited attention and processing capacity for foreign information.

Keywords: Market Inefficiency, Multinational Firms, Gradual Information Diffusion, Limited Attention, Industry Momentum

JEL Classification: G10, G11, G14, G15

Suggested Citation

Huang, Xing, Gradual Information Diffusion in the Stock Market: Evidence from U.S. Multinational Firms (November 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2022841 or http://dx.doi.org/10.2139/ssrn.2022841

Xing Huang (Contact Author)

Washington University in St. Louis - Olin Business School ( email )

Simon Hall 211
Washington University in St. Louis
St. Louis, MO 63130
United States

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