The Role of Firm Investment in Momentum and Reversal

73 Pages Posted: 4 Nov 2013 Last revised: 10 Jul 2018

See all articles by Sandra Mortal

Sandra Mortal

University of Alabama - Culverhouse College of Commerce & Business Administration

Michael J. Schill

University of Virginia - Darden School of Business

Date Written: July 10, 2018

Abstract

We propose that the time delay inherent in firm investment is what creates the time delay in stock returns observed in the momentum and reversal regularities. We provide intuition for our hypothesis and show empirically that indeed the momentum and reversal effects occur not in isolation, but are concurrent with systematic patterns in firm investment. For example, winners only continue to win when there is also subsequent investment, and losers only continue to lose when there is also subsequent disinvestment. Although our paper is about understanding the nature of the price pattern delay rather than examining a trading strategy, our tests suggest ways to enhance trading returns. Our results provide novel evidence on a potential source of delay in momentum and reversals regularities.

Keywords: Momentum, Return reversal, Asset Growth

JEL Classification: G12

Suggested Citation

Mortal, Sandra and Schill, Michael J., The Role of Firm Investment in Momentum and Reversal (July 10, 2018). Darden Business School Working Paper No. 2348316. Available at SSRN: https://ssrn.com/abstract=2348316 or http://dx.doi.org/10.2139/ssrn.2348316

Sandra Mortal

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States

Michael J. Schill (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4071 (Phone)
434-243-7676 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/schill.htm

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