Thinking Outside the Borders: Investors’ Inattention to Foreign Operations

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, nor can be explained by the future change of risks. 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 Englishspeaking 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. *Email: [email protected]. A previous version of the paper was distributed under the title “Gradual Information Diffusion in the Stock Market: Evidence from U.S. Multinational Firms”. I am deeply grateful to Stefano DellaVigna (Co-Chair), Ulrike Malmendier (Co-Chair), Terrance Odean, Adam Szeidl, Nancy Wallace for their invaluable advice and encouragement. I would also like to thank Nicholas Barberis, Ben Chabot, Lauren Cohen, Martijn Cremers, Brett Green, David Hirshleifer, Dmitry Livdan, Dong Lou, Joshua Pollet, Jeremy Stein, and seminar participants at AFA, Annual Meeting of the Academy of Behavioral Finance & Economics, Arrowstreet, Chicago Fed, Cornerstone, EconCon, Helsinki Finance Summit, Miami Behavioral, MSU, PDT, SEC, Temple, UC Berkeley, UIC, U of Toronto, Virginia Tech, Yale for very helpful suggestions and comments. All errors are my own.