The Value of U.S. MNC Earnings Changes from Foreign and Domestic Operations

This study examines whether the stock return associated with changes in domestic and foreign earnings varies depending upon the sign of the change. Evidence is presented that negative foreign (vs. domestic) earnings changes are associated with significantly larger stock returns. In contrast, positive foreign and domestic earnings changes are associated with statistically indistinguishable returns. The large association coefficient corresponding to negative foreign earnings changes is especially pronounced for firms with substantial free cash flow and for firms with high anticipated growth opportunities. No evidence is found that positive foreign earnings changes result in high returns due to foreign market growth opportunities.