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Price and earnings momentum: An explanation using return decomposition

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  • Mao, Mike Qinghao
  • Wei, K.C. John

Abstract

We explain price and earnings momentum by investigating dynamics of cash flow (CF) news and discount rate (DR) news. We find that before the holding period, winners experience higher DR news than losers, which makes winners display lower ex-ante expected returns than losers. Momentum returns come from the persistently higher CF news for winners as compared to losers both before and during the holding periods. The evidence favors a behavioral explanation that the market incorporates cash flow information too slowly, which drives momentum returns. In addition, we find that the DR news, in particular that of the momentum losers, drives the time-series profitability of momentum strategies. Furthermore, by comparing price momentum with earnings momentum, we show that the relative load on past CF news as compared to past DR news affects long-run portfolio performance.

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  • Mao, Mike Qinghao & Wei, K.C. John, 2014. "Price and earnings momentum: An explanation using return decomposition," Journal of Empirical Finance, Elsevier, vol. 28(C), pages 332-351.
    • Handle: RePEc:eee:empfin:v:28:y:2014:i:c:p:332-351
    DOI: 10.1016/j.jempfin.2014.04.003
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    3. Bellu, Mirko & Conversano, Claudio, 2020. "Protected Adaptive Asset Allocation," Finance Research Letters, Elsevier, vol. 32(C).
    4. Fink, Josef, 2021. "A review of the Post-Earnings-Announcement Drift," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).
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    6. Khimich, Natalya, 2017. "A comparison of alternative cash flow and discount rate news proxies," Journal of Empirical Finance, Elsevier, vol. 41(C), pages 31-52.

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    More about this item

    Keywords

    Return decomposition; Cash flow news; Discount rate news; Price momentum; Earnings momentum;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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