57 Pages Posted: 6 Mar 2011 Last revised: 2 Oct 2012
Date Written: September 30, 2012
We develop and test a frog-in-the-pan (FIP) 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 frequent gradual changes attracts less attention than infrequent dramatic changes and construct an information discreteness measure to capture the intensity of firm-level information flows. In contrast to most firm characteristics that explain return contin- uation, information discreteness is not persistent. Consistent with our FIP hypothesis, we find that continuous information induces strong persistent return continuation that does not reverse in the long run. 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. Moreover, the abil- ity of continuous information to explain return continuation increases when investor attention constraints are more likely to bind and is not attributable to the disposition effect.
Keywords: Momentum, Information Discreteness, Idiosyncratic Volatility
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation
Da, Zhi and Gurun, Umit G. and Warachka, Mitch, Frog in the Pan: Continuous Information and Momentum (September 30, 2012). AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1777988 or http://dx.doi.org/10.2139/ssrn.1777988
By Craig Brown