Familiarity bias and earnings-based equity valuation

Yashu Dong (), Danqing Young () and Yinglei Zhang ()
Additional contact information
Yashu Dong: Shanghai University of Finance and Economics
Danqing Young: The Chinese University of Hong Kong
Yinglei Zhang: The Chinese University of Hong Kong

Review of Quantitative Finance and Accounting, 2021, vol. 57, issue 2, No 12, 795-818

Abstract: Abstract This study examines whether investors’ familiarity bias affects their earnings-based equity valuation. Building on theoretical and empirical findings from prior studies, we hypothesize that familiarity bias may reduce the earnings-based equity valuation of foreign firms. We also hypothesize that the perceived link between current earnings surprises and future operating cash flows is one channel through which familiarity bias affects earnings-based equity valuation. Using the setting of the earnings announcements of U.S.-listed non-U.S. firms and U.S. firms matched by industry, year, and firm characteristics, we find that U.S. investors discount the earnings response coefficient of non-U.S. firms relative to that of U.S. firms by 46%. Using analysts’ earnings forecast revisions immediately following the earnings announcements as the proxy for the market-perceived link between current earnings surprises and future operating cash flows, we find that analysts significantly discount the link for non-U.S. firms relative to U.S. firms. Both discounts exist only in the subsamples of non-U.S. firms toward which U.S. investors have a higher degree of familiarity bias. Thus, we provide empirical evidence of the effect of the familiarity bias on earnings-based equity valuation and the channel through which it affects equity valuation.

Keywords: Familiarity bias; Earnings-based equity valuation; Earnings response coefficients; Analyst earnings forecast revisions (search for similar items in EconPapers)
JEL-codes: G12 G14 G41 M41 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://link.springer.com/10.1007/s11156-020-00949-y Abstract (text/html)
Access to full text is restricted to subscribers.

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:kap:rqfnac:v:57:y:2021:i:2:d:10.1007_s11156-020-00949-y

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

DOI: 10.1007/s11156-020-00949-y

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().