A test of the market's mispricing of domestic and foreign earnings☆

Abstract

This study investigates whether abnormal returns can be earned using public information about firms’ domestic and foreign earnings. The results indicate that the market understates foreign earnings’ persistence. As a result, it is possible to construct a zero-investment hedge portfolio that consistently earns positive returns across years. A disproportionate fraction of the positive abnormal returns to the long position is concentrated in the few days surrounding the subsequent year's quarterly earnings announcement dates. Furthermore, the abnormal returns do not appear to persist beyond the subsequent year. The results are consistent with market mispricing, and not mis-estimated risk.