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

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.