A test of the markets mispricing of domestic and foreign earnings

This study investigates whether abnormal returns can be earned using public information about firmsʹ domestic and foreign earnings. The results indicate that the market understates foreign earningsʹ 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 yearʹs 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 misestimated risk.