Frog in the Pan: Continuous Information and Momentum

Abstract

We develop and test a frog-in-the-pan hypothesis that predicts investors are less attentive to information arriving continuously in small amounts than to information with the same cumulative stock price implications arriving in large amounts at discrete timepoints. Intuitively, we hypothesize that a series of gradual frequent changes attracts less attention than infrequent dramatic changes. Consistent with our frog-in-the-pan hypothesis, we find strong evidence that continuous information induces stronger and more persistent return continuation. Over a six-month holding period, momentum decreases monotonically from 8.86% for stocks with continuous information during their formation period to 2.91% for stocks with discrete information but similar cumulative formation-period returns. Higher media coverage and higher analyst coverage are associated with more discrete and more continuous information, respectively. Therefore, provided a firm receives sufficient media coverage, low analyst coverage does not necessarily correspond to stronger return continuation.

Keywords: momentum, limited attention, information discreteness