Does Foreign Information Predict the Returns of Multinational Firms Worldwide?

Abstract

We investigate whether value-relevant foreign information only gradually dilutes into stock prices of multinational firms worldwide. Using an international sample of firms from 22 developed countries, we find that a portfolio strategy based on firms' foreign sales information yields future returns of more than 10% p.a. globally. The return spread due to foreign information is substantial across different geographical regions and cannot be explained by traditional risk factors, firm characteristics, and industry momentum. Our results are in line with limited attention of investors to foreign information being the main driver of this effect worldwide.

Insider trading in multinational firms

“…To the extent that some outside investors are familiar with the foreign language and culture related to the countries where multinational firms operate or outside investors live in those foreign countries, their familiarity with those foreign markets and their related trading would likely bias us against the results we observe in this study. The pricing delays of foreign information into multinational firm stock identified by Huang (2015) and Finke and Weigert (2017) suggest that not only the lack of familiarity with foreign information, but also a tendency for outside investors to be inattentive to such information suggests that the trading advantage we identify for multinational insiders is not unfounded.…”

“…The challenge of understanding foreign information may be greater if the origin of the foreign information is more linguistically or culturally distant from outside investors. Huang (2015) and Finke and Weigert (2017) link information processing to the speed at which information is priced in equity markets. Moreover, according to Huang (2015), Asian countries are more culturally and linguistically distant from the US than other English-speaking or European countries.…”

“…Outside of the insider trading literature, the studies closest to our paper focus on international information diffusion into equity markets. For example, Huang (2015) and Finke and Weigert (2017) examine how foreign news and information are incorporated into stock prices and observe that markets are slower to incorporate these details. Huang (2015) notes the information diffusion is related to linguistic and cultural differences that impede news incorporation, while Finke and Weigert (2017) focus on the value relevance of foreign sales.…”

Maritime Stock Prices and Information Flows: A Cointegration Study

“…Similarly, Lin (2015) finds that stock returns in many Asian markets can be predicted by Singapore stock market returns. Other evidence of the international gradual diffusion hypothesis has been found in a sample of firms in twenty-two emerging market countries (Finke and Weigert, 2017), and by examining information flows between the foreign exchange market and stock market returns (Hasselgren et al, 2020) Another factor that may slow down flows of information from maritime stock prices is corporate governance. Chan and Hameed (2006) argue that family ownership or poor corporate governance may slow down information flows from stocks.…”

The cross‐predictability of industry returns in international financial markets

“…Cen et al (2016) focus on the implications of the institutional and regulatory environment of foreign customers for US suppliers. Finke and Weigert (2017) find that foreign information only gradually dilutes into the stock prices of multinational firms worldwide. Smajlbegovic (2019) finds that information about regional economic activity is gradually incorporated into stock prices.…”