Underreaction to Foreign Operations Information

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. I find that the market responds more slowly in periods with lower media coverage of foreign news and to information from more linguistically and culturally distant countries. These results suggest that both investors ’ inattention and lack of understanding of foreign information slow the incorporation of new information into prices. I further separate these two mechanisms by examining market responses to earnings surprises. (JEL G02, G14, G15) Many large public firms operate on a truly global basis. There are likely to be many benefits from this global structure, including the potential for operating efficiencies and a relatively low cost of capital. At the same time, investing in these firms may present challenges to investors in a world with information collection costs and/or biases and limitations in investors ’ ability to process value-relevant information. These obstacles, coupled with the presence of slow