Does the Delay in Firm-Specific Information Cause Momentum?

Abstract

In this paper, I develop a medium-horizon firm-specific information delay (FSID) measure using the methodology introduced by Hou and Moskowitz (2005) (hereafter HM). Unlike the HM measure of the speed of diffusion of US market-specific information in the short horizon (four weeks), FSID measures the speed of diffusion of firm-specific information in the medium horizon (six months). Whereas previous studies including HM found no significant relation between momentum premium and the HM measure, I find that momentum ceases to exist in the cross section of firms after controlling for FSID. FSID has a symmetrical effect on both loser and winner firms: high-FSID loser firms lose more than low-FSID loser firms, while high-FSID winner firms win more than low-FSID winner firms. High-FSID firms are firms with greater uncertainties related to their fundamentals; these are slightly larger growth firms, have higher dispersion among analysts about their future earnings, pay low dividends, have higher costs of goods, have higher volatility around their profitability, and actively perform major corporate events.

Keywords: Momentum, Asset Retruns, Information Delay, Investor Phychology

JEL Classification: G11, G12, G14