Uncertainty avoidance and stock price informativeness of future earnings

Abstract

We explore whether uncertainty avoidance, an important aspect of national culture, influences the level of informativeness of share prices about future earnings. Uncertainty avoidance relates to the extent to which the members of a society feel threatened by uncertain or unknown situations. We employ data from 20 countries, comprising of 26,882 firm-year observations reporting under the same accounting standards. Using panel data analysis with OLS regressions, we show that firms’ current stock returns incorporate less future earnings information in countries with high uncertainty avoidance. Further, we report that this relation is less pronounced within countries with relatively high market openness, consistent with the premise that the effect of national culture is reduced when a country’s market is more open to foreign investors. Our study contributes to the literature by showing that international investors’ innate differences affect their ability to anticipate future earnings and impound this information into current prices. As such, the benefits of adopting a common set of accounting standards are uneven across countries not only because of the way the standards are applied but also due to investors’ innate differences.