Responses in divergence of opinion to earnings announcements: evidence from American depository receipts
International Journal of Managerial Finance
ISSN: 1743-9132
Article publication date: 11 March 2022
Issue publication date: 28 March 2023
Abstract
Purpose
The purpose of this paper is to investigate the relationship between investors' divergence of opinions and the asset prices of foreign stocks and also examine the effect of home market country-level factors on the influence of divergency of opinions on stock price.
Design/methodology/approach
The authors employ panel data estimation with fixed effects to examine the host market response in divergent opinions to the earnings announcements. The paper uses the American Depositary Receipts (ADRs) of 42 countries from 1985 to 2011.
Findings
The authors find a negative relationship between differences of opinions and excess quarterly earnings announcement returns, and investors do process information asymmetrically based on good and bad earnings shocks. In addition, the authors find the negative relationship between divergent opinions and excess earnings announcement returns in ADRs is more pronounced in countries with short-sales restrictions, while other home-market country-level factors – the enforcement of insider trading law, legal origin, investor protection and rating on accounting standard – do not influence the relationship between investors' divergency of opinion and stock returns.
Originality/value
This paper is among the first to bring asymmetric effects on convergence in Miller framework and enhance the understanding of price convergence documented in Miller (1977). In addition, this study incorporates home-market country-level factors in explaining the relationship between investors' divergency of opinions and stock returns.
Keywords
Acknowledgements
The authors thank Haigang Zhou, Michael Hu, Michael Ellis, Xiaoling Pu, Jay Muthuswamy, Runqing Mao for their helpful comments and suggestions. The paper has benefited from the comments of an anonymous referee.
Citation
Shen, F., Guo, Q., Liang, H. and Liu, Z. (2023), "Responses in divergence of opinion to earnings announcements: evidence from American depository receipts", International Journal of Managerial Finance, Vol. 19 No. 2, pp. 385-420. https://doi.org/10.1108/IJMF-08-2021-0375
Publisher
:Emerald Publishing Limited
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