The roles of past returns and firm fundamentals in driving US stock price movements

This paper provides new empirical evidence that incorporating past stock returns from different time horizons can enhance the ability of firm fundamentals to better explain stock price movements but this benefit dissipates under uncertainty. We apply both OLS and state-space modeling to US firms' stock price movements over the period from 1999 to 2012 to compare the roles of the two main types of information typically used by equity investors. Empirical results reveal the importance of firm fundamentals over longer term horizons for particularly, small-cap stocks with greater information uncertainty. Furthermore, when market uncertainty is high, fundamentals unambiguously dominate in driving stock price movements of smaller sized firms indicating that uncertainty at the firm and market level both create attention bias on firm fundamentals.