Individualism, Uncertainty Avoidance, and Earnings Momentum in International Markets

Abstract

This study examines whether cultural dimensions such as individualism and uncertainty avoidance can explain the variation in the profitability of the earnings momentum strategies in international markets. Using the time-varying cultural indices of Tang and Koveos (2008) for 30,383 firms from 41 countries over the period 1995-2008, we show that the level of individualism in a country is positively associated and the level of uncertainty avoidance is negatively associated with earnings momentum profits. Our findings are robust to the inclusion of a comprehensive set of control variables and alternative cultural metrics. The central message is that we emphasize the necessity to go beyond the assumption of perfect rationality and to account for innate differences among international investors to explain how accounting information is incorporated into stock prices. We recommend that cultural dimensions be included in cross-country research to account for innate differences among international investors. * This study was accepted by Gordon Richardson. We thank Patricia O'Brien, Gordon Richardson, Steven Salterio, and two anonymous reviewers for their helpful comments and suggestions. We also thank comptable influe sur le cours des actions. Les auteurs recommandent la prise en compte des caract eristiques culturelles dans les recherches portant sur plusieurs pays pour tenir compte des diff erences intrins eques entre les investisseurs internationaux.

Do culture, sentiment, and cognitive dissonance explain the ‘above suspicion’ anomalies?

“…However, while others have examined the roles of sentiment and culture in explaining anomalies separately, we provide the first investigation of the joint impact of sentiment and culture. More importantly, by considering cultural differences relating to views of change, rather than individualism and uncertainty avoidance, our work draws on, and extends, that of Chui et al (), Dou et al (), and Antoniou et al (), among others, and demonstrates that the interaction of sentiment and culture affects cognitive dissonance and the extent of momentum profits and PEAD. Moreover, our results are consistent with the interaction explaining differences previously documented in the literature in the existence and strength of these anomalies between western and ESEA cultures.…”

“…In this paper we consider the joint effect of culture and sentiment on momentum and PEAD. Previous studies examining the role of culture on these anomalies have concentrated on Hofstede's individualism and uncertainty avoidance measures (see Chui et al, ; Dou et al, ). In contrast, we focus on cultural differences relating to views of change and their interaction with sentiment.…”

“…Thus, while there is a clear split between western and ESEA markets for momentum, the picture is mixed for earnings momentum. Nonetheless, as Dou et al () show, culture is clearly related to PEAD, as it has been shown to be for momentum by Chui et al ().…”

“…Similarly, in relation to earnings momentum, Hong et al () examine 11 markets and find significant profits for all of the western markets in their sample and only one (Hong Kong) of six ESEA markets. However, while Dou et al () find a significant relationship between zero‐investment earnings momentum strategies and culture, they find significant positive returns for most of the major western and ESEA markets (the exception being Singapore, where returns are insignificantly different from zero). Thus, while there is a clear split between western and ESEA markets for momentum, the picture is mixed for earnings momentum.…”

“…For example, behavioral‐based theoretical models have been developed by Daniel, Hirshleifer, and Subrahmanyam (1998), Barberis, Shleifer, and Vishny (1998), and Hong and Stein () based on either psychological biases (e.g., overconfidence, representativeness, self‐attribution bias) or bounded rationality within a heterogeneous trader model. In terms of empirical evidence, examples include the role of market state (Cooper, Gutierrez, & Hameed, ), macroeconomic risk or conditions (Chordia & Shivakumar, ; Liu & Zhang, ), international rather than national risk (Asness, Moskowitz, & Pedersen, ; Fama & French, ), culture (Chui, Titman, & Wei, ; Dou et al, ), sentiment (Antoniou et al, ), the role of aspects of information (diffusion, asymmetry) and conservatism (Chen, Chou, & Hsieh, 2017; Da, Gurun, & Warachka, ; Doukas & McKnight, ), arbitrage risk (Mendenhall, ), security analyst experience (Mikhail, Walther, & Willis, ), transaction costs (Agyei‐Ampomah, ), dispersion in analysts’ forecasts and analyst forecast errors (Dische, ; Kang, Khurana, & Wang, ), and corruption and investor protection (Hong, Lee, & Swaminathan, ), among others. However, despite this work the reasons for the existence of profits from momentum strategies and PEAD remain unclear.…”