International Diversification,SFAS 131 and Post‐Earnings‐Announcement Drift

Using 1990 through 2013 data of U.S. firms with foreign operations, we show that (i) the serial correlation of analyst forecast errors increases in the extent of international diversification, (ii) post‐earnings‐announcement drift (PEAD) based on analyst forecast errors increases in the extent of international diversification, and (iii) the impact of international diversification on the serial correlation of analyst forecast errors and its associated drift is significantly reduced after the implementation of SFAS 131 on segment disclosures. When we replicate our tests using seasonally differenced earnings, we fail to observe similar patterns. Overall, our results suggest that investors’ underreaction to announced earnings is a likely explanation for PEAD. Our findings also indicate that disclosures required under SFAS 131 are useful to analysts in forming efficient earnings expectations, thereby helping capital market participants in the pricing of internationally diversified firms’ earnings.