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Individualism, Uncertainty Avoidance, and Earnings Momentum in International Markets
Author(s) -
Dou Paul,
Truong Cameron,
Veeraraghavan Madhu
Publication year - 2015
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1111/1911-3846.12155
Subject(s) - uncertainty avoidance , individualism , earnings , profitability index , rationality , momentum (technical analysis) , economics , hofstede's cultural dimensions theory , financial economics , stock (firearms) , emerging markets , accounting , political science , finance , social psychology , psychology , market economy , geography , collectivism , archaeology , law
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.