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

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. The return predictability is not driven by industry momentum or anticipated changes in future risks. The effect is more pronounced in periods with lower media coverage of foreign news. Controlling for media coverage, I find that the market responds more slowly to information from more linguistically and culturally distant countries. These results show that both investors’ limited attention and their lack of understanding of foreign information matter for the return effects. I further separate these two mechanisms by examining market responses to earnings surprises.