Level of Economic Development of a Firms Country of Domicile and the Patterns in Stock Market Reaction Surrounding US Earnings Announcements: A Test of the Global Market Segment Hypothesis

• Main Author: Kang, Tony
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2003
• Subjects: Accounting; Finance and Financial Management; International Business
• Online Access: https://ink.library.smu.edu.sg/soa_research/13; http://dx.doi.org/10.2308/jiar.2003.2.1.23
• Institution: Singapore Management University

Using the level of economic development as a proxy for the degree of capital market segmentation, this study tests the global market segmentation hypothesis, which predicts that the magnitude of the market's reaction to an earnings announcement of an American Depositary Receipt (ADR) firm will vary systematically with the extent to which the firm's home country capital market is segmented. Supporting this idea, the evidence shows that the earnings announcement of an emerging economy ADR induces a larger market reaction than a developed economy ADR. This finding contributes to the market segmentation literature by providing evidence that the market can remain segmented even after cross-listing in the sense that the information environment of firms from segmented economies remains weaker. It also extends prior literature on the information content of earnings by documenting that the degree of capital market segmentation in a multinational firm's country of domicile is an important determinant of the information content of its U.S. earnings announcement. [PUBLICATION ABSTRACT]