Global de-diversification and stock returns

Using international firm-level data, we show that when a multinational corporation reported zero total sales made by its foreign operations, it constitutes a salient signal of global dediversification. A simple long-short strategy portfolio that buys stocks of multinational firms and sells stocks of ex-multinational firms that report zero foreign sales earns up to 85 basis points per month (over 10% per year). Further examination suggests that investors' inattention and limits to arbitrage could explain this return predictability. This paper is among the first to document evidence of the impact of global de-diversification on stock returns.