J. OF FINANCE, Vol. 51 No. 5, December 1996
Posted: 23 Oct 1996
We examine whether the predictability of future returns from past returns is due to the market's underreaction to information, in particular to past earnings news. Past returns and past earnings surprise each and predict large drifts in future returns after controlling for the other. Market risk, size and book-to-market effects do not explain the drifts. There is little evidence of subsequent reversals in the returns of stocks with high price and earnings momentum. Security analysts' earnings forecasts also respond sluggishly to past news, especially in the case of stocks with the worst past performance. The results suggest a market that responds only gradually to new information.
JEL Classification: G19
Suggested Citation: Suggested Citation