The information content of stock markets around the world: A cultural explanation

Nhut H. Nguyen and Cameron Truong

Journal of International Financial Markets, Institutions and Money, 2013, vol. 26, issue C, 1-29

Abstract: We draw on the psychology literature on cross-country cultural differences to explain the information content of stock markets around the world. We show that cultural dimensions in the studies of Hofstede (1980, 2001) such as individualism and uncertainty avoidance closely relate to several behavioral biases widely discussed in accounting and finance research. These cultural dimensions also signal different risk preferences. We argue that behavioral biases and risk preferences influence how international investors act on firm-specific information and empirically test whether individualism and uncertainty avoidance indexes can explain the cross-country information content of stock markets. We compute R2 from the market model to measure the general information content of stock markets in the long term, abnormal return variance, and abnormal trading volume around earnings announcements to measure the short-term information content of earnings announcements. Using more than 150,000 earnings announcements from 42 countries for the period 1990–2006, we find that the information content of stock markets is higher in more individualistic countries and in low uncertainty-avoiding countries. The relations between cultural dimensions and measures of information content are robust to the inclusion of several control variables or the use of updated cultural indexes that account for possible changes in cultures over time.

Keywords: Information content; Earnings announcements; R2; Abnormal return variance; Abnormal trading volume; Behavioral biases; Risk preferences (search for similar items in EconPapers)
JEL-codes: G14 G15 M41 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S104244311300019X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:26:y:2013:i:c:p:1-29

DOI: 10.1016/j.intfin.2013.03.001

Access Statistics for this article

Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

More articles in Journal of International Financial Markets, Institutions and Money from Elsevier
Bibliographic data for series maintained by Catherine Liu ().