Transitory Earnings Shocks, Financial Constraints and Price Momentum

57 Pages Posted: 25 Oct 2021

Date Written: October 21, 2021


I examine the separate roles of persistent and transitory earnings shocks in explaining price momentum. I find that transitory shocks have significant explanatory power, suggesting financial constraints may be important for momentum firms. In a liquidity management model that accounts for both types of shocks, the most constrained firms end up in the extreme past performance portfolios. High expected cash-flow growth carries a positive risk for constrained firms, driving the difference in expected returns between winners and losers. The model reproduces the average momentum premium and its dissipation one year after formation observed in the data. Empirical proxies for financial constraints and expected growth confirm model predictions.

Keywords: Momentum, earnings surprises, financing constraints

JEL Classification: G12, G32

Suggested Citation

Pazaj, Elisa, Transitory Earnings Shocks, Financial Constraints and Price Momentum (October 21, 2021). Available at SSRN: or

Elisa Pazaj (Contact Author)

University of Amsterdam ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
PlumX Metrics