Compared to domestic firms, foreign firms do not experience the same positive stock returns when earnings meet or beat analyst forecasts.
On the other hand, foreign firms suffer a similar market penalty as domestic firms when they fail to meet or beat forecasts.
Institutional characteristics of a foreign firm’s home country affect the level of disparity in market returns.
Language and cultural differences also impact the differing market returns.
Investments in foreign firms are an important part of a well-diversified portfolio. However, investors must be aware of the risks associated with these investments. Depending on firm characteristics, it may be more difficult for investors to experience positive returns when dealing with foreign firms based on inherent market biases. Investors can mitigate these risks by investing in firms from countries with strong legal enforcement and that are less culturally distant from the U.S.
Managers of a foreign firm that is looking to raise capital in the U.S. should be aware of the challenges and the increased skepticism surrounding the earnings of foreign firms. While country-level factors cannot be influenced by an individual firm, managers can mitigate some investor concern and bias with increased transparency and communication.
Numerous other factors can impact the market reaction to the news that a firm’s earnings meet or beat analyst expectations. For example, current market and economic conditions also impact the strength of the market reaction to positive or negative earnings surprises, as explained in a recent article from FactSet (linked below).
Based upon the following peer-reviewed manuscript: Jennifer Bannister, Li-Chin Jennifer Ho, Xiaoxiao Song; Does the U.S. Market Reward Foreign Firms and Domestic Firms Differently? Evidence from Meeting-or-Beating Earnings Expectations. Journal of International Accounting Research 1 March 2023; 22 (1): 1–28.