Differences of Opinion and International Equity Markets

We develop an international financial market model in which domestic and foreign residents differ in their beliefs about the information content in public signals. We determine how informational advantages by domestic (foreign) investors in the interpretation of home (foreign) public signals impact equity markets. Our model generates four standard international pricing anomalies: (i) the co-movement of returns and international capital flows; (ii) home equity preference; (iii) the dependence of firm returns on home and foreign factors; and (iv) abnormal returns around foreign firm cross-listing in the home market.