Frog in the Pan: Continuous Information and Momentum

48 Pages Posted: 24 Jan 2011 Last revised: 8 May 2011

Zhi Da

University of Notre Dame - Mendoza College of Business

Umit G. Gurun

University of Texas at Dallas - Naveen Jindal School of Management

Mitch Warachka

University of San Diego; Claremont McKenna College - Robert Day School of Economics and Finance

Multiple version iconThere are 3 versions of this paper

Date Written: May 4, 2011

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

Suggested Citation

Da, Zhi and Gurun, Umit G. and Warachka, Mitch, Frog in the Pan: Continuous Information and Momentum (May 4, 2011). Available at SSRN: https://ssrn.com/abstract=1745247 or http://dx.doi.org/10.2139/ssrn.1745247

Zhi Da

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Umit G. Gurun

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Mitch Warachka (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States

University of San Diego ( email )

5998 Alcala Park
University of San Diego
San Diego, CA 92110-2492
United States

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