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

By Harrison G. Hong, Terence Lim, Jeremy C. Stein. 2000

2,623 citations recorded by the source corpus.

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.

Subfields: Accounting, Finance, Information Systems

View Paper: https://www.semanticscholar.org/paper/ff77f13dd2a3ebe160c6bbf4bd98544526b0af14

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Citations in the corpus

Psychology-based Models of Asset Prices and Trading Volume (2018, result): “Hong et al. (2000) provide evidence in support of the model’s predictions.”
Momentum Strategies in Commodity Futures Markets (2007, neutral): “The increase (decrease) in the futures price over the life of the contract is referred to as normal backwardation (contango) (for more on this, Keynes, 1930; Hicks, 1939; or, more recently, Miffre, �000).”
Breadth of Ownership and Stock Returns (2002, background): “argument is closely related to the observation that the bulk of profits in momentum strategies appear to come from the short side of the trade (Hong et al., 2000).”
Underinvestment vs. overinvestment: Evidence from price reactions to pension contributions (2009, result): “This interpretation is consistent with the empirical evidence suggesting that bad news in general takes longer to spread among investors (Hong, Lim, and Stein (2000)).”
Innovative Efficiency and Stock Returns (2013, neutral): “…stock return lead-lags suggests that information diffuses gradually from large to small firms, across industries, and between firms that are followed by different numbers of analysts (Brennan, Jegadeesh, and Swaminathan, 1993; Hong, Torous, and Valkanov, 2007; Hou, 2007; Cohen and Frazzini, 2008).”