Louis K.C. Chan
University of Illinois at Urbana-Champaign - Department of Finance
Emory University - Department of Finance
University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)
NBER Working Paper No. w5375
We relate the predictability of future returns from past returns to the market's underreaction to information, focusing on past earnings news. Past return and past earnings surprise each predict large drifts in future returns after controlling for the other. There is little evidence of subsequent reversals in the returns of stocks with high price and earnings momentum. Market risk, size and book-to- market effects do not explain the drifts. Security analysts' earnings forecasts also respond sluggishly to past news, especially in the case of stocks with the worst past performance. The results suggest a market that responds only gradually to new information.
Number of Pages in PDF File: 40
Date posted: July 24, 2000