Overreaction or Underreaction to Intra-Industry Earnings Information Transfer: A Cross-Country Analysis

We apply the moderated confidence hypothesis (MCH) to investigate overreaction and underreaction in intra-industry earnings information transfers in an international setting. MCH predicts that late announcing firms’ investors overreact (underreact) to early announcing industry peers’ earnings news when early announcing peers’ earnings news is imprecise (precise) signals of late announcing firms’ earnings. Consistent with this notion, we find that late announcing firms’ investors overreact to early announcing peers’ earnings news in a large sample of international firms. To the extent that the country-level information environment and culture share the precision of peers’ earnings as signals of each other’s earnings, we find that late announcing firms’ investors are more likely to underreact in countries with a richer information environment, are more likely to overreact in countries with higher individualism, and are less likely to overreact in countries with higher uncertainty avoidance.