Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies

doi:10.1111/0022-1082.00206

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Wiley InterScience

The Journal of Finance

Volume 55 Issue 1, Pages 265 - 295

Published Online: 17 Dec 2002

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Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies

Harrison Hong , Terence Lim & Jeremy C. Stein

¹ Stanford Business School, ² Goldman Sachs, ³ MIT Sloan School of Management and the National Bureau of Economic Research

ABSTRACT

Various theories have been proposed to explain momentum in stock returns. We test the gradual-information-diffusion model of Hong and Stein (1999) and establish three key results. First, once one moves past the very smallest stocks, the profitability of momentum strategies declines sharply with firm size. Second, holding size fixed, momentum strategies work better among stocks with low analyst coverage. Finally, the effect of analyst coverage is greater for stocks that are past losers than for past winners. These findings are consistent with the hypothesis that firm-specific information, especially negative information, diffuses only gradually across the investing public.

DIGITAL OBJECT IDENTIFIER (DOI)

10.1111/0022-1082.00206 About DOI