Earnings and Price Momentum

This paper examines whether earnings momentum and price momentum are related. Both in time-series as well as in cross-sectional asset pricing tests, we find that price momentum is captured by the systematic component of earnings momentum. The predictive power of past returns is subsumed by a zero-investment portfolio that is long on stocks with high earnings surprises and short on stocks with low earnings surprises. Further, returns to the earnings-based zero-investment portfolio that is long on stocks with high earnings surprises. Further, returns to the earnings-based zero-investment portfolio are significantly related to future macroeconomic activities, including growth in GDP, industrial production, consumption, labor income, inflation, and T-bill returns. Our results have implications for the Carhart four-factor model and suggest that the price-momentum factor in the Carhart model is merely a noisy proxy for the earnings-momentum based hedge portfolio, PMN.

Keywords: Momentum, earnings momentum, post-earnings-announcement drift

JEL Classification: G11

Suggested Citation: Suggested Citation

Chordia, Tarun and Shivakumar, Lakshmanan, Earnings and Price Momentum (May 23, 2005). AFA 2003 Washington, DC Meetings, Available at SSRN: https://ssrn.com/abstract=342581 or http://dx.doi.org/10.2139/ssrn.342581