The Role of 'Other Information' in the Valuation of Foreign Income for U.S. Multinationals

36 Pages Posted: 26 Apr 2005

See all articles by Ole-Kristian Hope

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Tony Kang

University of Nebraska - Lincoln

Multiple version iconThere are 2 versions of this paper

Date Written: April 5, 2005

Abstract

In this paper, we examine investors' valuation of the domestic and foreign components of total earnings after controlling for information beyond current earnings. Our sample consists of U.S. multinationals during the 1985-2002 period. In a prior study, Bodnar and Weintrop (1997) find that investors place a higher weight on foreign earnings than on domestic earnings in valuing securities, and that this finding can be explained in part by the higher growth opportunities in foreign markets. While this explanation is intuitively appealing, other possible explanations include the varying importance of information other than current accounting earnings in pricing securities and the possible mis-specification of their model. One potentially important source of other information is information contained in revisions of analysts' forecasts of future (abnormal) earnings and terminal values. Excluding this information from the regression specification potentially leads to a correlated omitted variables problem. In this paper, we use the Liu and Thomas (2000) proxy for "other information," which is derived from analysts' revisions of near-term and long-term earnings forecasts and discount rate changes. Including the "other information" variable greatly improves the explanatory power of the returns-earnings regression. Consistent with our predictions, we find that the bias resulting from excluding other value-relevant information has a greater effect on foreign earnings than on domestic earnings. Foreign earnings are no longer incrementally value relevant when we control for "other information."

Keywords: Accounting, foreign earnings, valuation, omitted variables, multinationals, analyst forecasts

JEL Classification: M41, G12, G14, G15, G29

Suggested Citation

Hope, Ole-Kristian and Kang, Tony, The Role of 'Other Information' in the Valuation of Foreign Income for U.S. Multinationals (April 5, 2005). Available at SSRN: https://ssrn.com/abstract=699081 or http://dx.doi.org/10.2139/ssrn.699081

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Tony Kang

University of Nebraska - Lincoln ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
258
Abstract Views
2,268
rank
164,306
PlumX Metrics