Diversity and Market Reactions to Corporate Earnings Announcements

We investigate the effect of diversity on market reactions to financial disclosure. We show elevated trading volume and stock return volatility around earnings announcements for firms headquartered in culturally and linguistically diverse locales. These results continue to hold when earnings announcements contain no news, consistent with investors in diverse locales having elevated heterogeneous interpretations of public announcements. We establish plausible causality by instrumenting local diversity with the extent of geographical isolation. Consistent with models of investor disagreement, further evidence shows that firms headquartered in diverse locales also have more stock price corrections around earnings announcements and are more prone to crash risk