Bad News Travels Slowly: Size, Analyst Coverage and the Profitability of Momentum Strategies

59 Pages Posted: 13 Jul 2000  

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Terence Lim

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: May 1998

Abstract

A number of theories have been proposed to explain the medium-term momentum in stock returns identified by Jegadeesh and Titman (1993). We test one such theory--based on the gradual-information-diffusion model of Hong and Stein (1997)--and establish three key results. First, once one moves past the very smallest stocks (where thin market-making capacity appears to be an issue) the profitability of momentum strategies declines sharply with firm size. Second, holding size fixed, momentum strategies work particularly well among stocks which have low analyst coverage. Finally, there is a strong asymmetry: the effect of analyst coverage is much more pronounced for stocks that are past losers than for stocks that are past winners. These findings are consistent with the hypothesis that firm-specific information only gradually across the investing public.

Suggested Citation

Hong, Harrison G. and Lim, Terence and Stein, Jeremy C., Bad News Travels Slowly: Size, Analyst Coverage and the Profitability of Momentum Strategies (May 1998). NBER Working Paper No. w6553. Available at SSRN: https://ssrn.com/abstract=226286

Harrison G. Hong (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Terence Lim

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Jeremy C. Stein

Harvard University - Department of Economics ( email )

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Cambridge, MA 02138
United States
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617-496-7352 (Fax)

HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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