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

By Jeffrey L. Callen, Ole‐Kristian Hope, D. Segal. 2005

151 citations recorded by the source corpus.

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.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/b7d107758a5c754624a29fbf02dabe314557c4c3

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Citations in the corpus

Investor Trading and the Post Earnings Announcement Drift (2011, unknown): “In addition, Bradshaw et al. (2004) and Callen et al. (2005) find that institutional investors suffer from biases in interpreting foreign earnings.”
The pricing of conservative accounting and the measurement of conservatism at the firm-year level (2010, background): “21 Following Vuolteenaho (2002), Callen and Segal (2004), Callen et al. (2005), and Callen et al. (2006), we assume that q = 0.967.”
A Review of the Value Relevance Literature (2009, background): “” In a variance decomposition analysis, Callen, Hope and Segal [89] document that domestic earnings contribute significantly more to unexpected stock price variability than do foreign earnings.”
Institutional Investor Stability and Crash Risk: Monitoring versus Short-Termism? (2013, background): “The mean and standard deviation of DUVOLT+1 are very similar to the estimates by Chen et al. (2001) using daily market-adjusted returns.”
Managerial Empire Building and Firm Disclosure (2008, background): “These measures are hypothesized to be affected by non-disclosure of geographic earnings because geographic earnings disclosures relate to the reporting of foreign operations.”