Domestic and Foreign Earnings, Stock Return Variability, and the Impact of Investor Sophistication

Journal of Accounting Research, Vol. 43, pp. 377-412, June 2005

36 Pages Posted: 8 May 2006

See all articles by Jeffrey L. Callen

Jeffrey L. Callen

University of Toronto - Rotman School of Management

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Dan Segal

Interdisciplinary Center (IDC) Herzliyah

Multiple version iconThere are 3 versions of this paper

Date Written: 2004-09-22

Abstract

We examine the importance of foreign earnings relative to domestic earnings for a sample of U.S. multinationals using variance decomposition. Our methodology represents an alternative and complementary approach over the prior literature, which is based on traditional regressions and earnings response coefficients. We document that domestic earnings are more important in explaining the variance of unexpected returns than are foreign earnings and that the relative importance of domestic earnings is a decreasing function of investor sophistication. Last, we classify institutional investors as either short- or long-term oriented following Bushee [1998]. We find that the variance contribution of foreign earnings increases with the level of investment by long-term investors. In contrast, there is no significant relation between the degree of ownership by short-term (or transient) investors and the variance contribution of domestic and foreign earnings. Overall, our results are consistent with Thomas`s [1999] finding that investors on average underestimate the persistence of foreign earnings.

Suggested Citation

Callen, Jeffrey L. and Hope, Ole-Kristian and Segal, Dan, Domestic and Foreign Earnings, Stock Return Variability, and the Impact of Investor Sophistication (2004-09-22). Journal of Accounting Research, Vol. 43, pp. 377-412, June 2005, Available at SSRN: https://ssrn.com/abstract=876676 or http://dx.doi.org/10.1111/j.1475-679x.2005.00175.x

Jeffrey L. Callen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-5641 (Phone)
416-971-3048 (Fax)

Ole-Kristian Hope

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

Dan Segal

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
35
Abstract Views
1,231
PlumX Metrics