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Information discreteness, price limits and earnings momentum

Author

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  • Lin, Chaonan
  • Ko, Kuan-Cheng
  • Chen, Yu-Lin
  • Chu, Hsiang-Hui

Abstract

The earnings momentum generates remarkably high profits in Taiwan, a market that has been widely documented to exhibit no momentum premium for conventional momentum strategies. Using the measure of information discreteness (ID) to identify the information flows of stock prices, we find that higher magnitudes of earnings surprises tend to occur in firms that attract less investor attention. Taking advantage of this observation, we confirm the prediction of the underreaction hypothesis by showing that earnings momentum profits are higher among stocks with more continuous information that is ignored by investors. Further, we propose that price limits are related to ID because they represent attention-grabbing events. We examine a modification of ID by considering the effect of price limits to explicitly isolate the continuous information from the discrete information. The evidence based on this modification provides more robust support for the underreaction hypothesis and rejects the overreaction hypothesis in explaining the profitability of the earnings momentum in Taiwan.

Suggested Citation

  • Lin, Chaonan & Ko, Kuan-Cheng & Chen, Yu-Lin & Chu, Hsiang-Hui, 2016. "Information discreteness, price limits and earnings momentum," Pacific-Basin Finance Journal, Elsevier, vol. 37(C), pages 1-22.
    • Handle: RePEc:eee:pacfin:v:37:y:2016:i:c:p:1-22
    DOI: 10.1016/j.pacfin.2016.02.003
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    Cited by:

    1. Hung, Weifeng & Yang, J. Jimmy, 2018. "The MAX effect: Lottery stocks with price limits and limits to arbitrage," Journal of Financial Markets, Elsevier, vol. 41(C), pages 77-91.
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    3. Zhaobo Zhu & Licheng Sun & Jun Tu, 2021. "Earnings momentum meets short‐term return reversal," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(S1), pages 2379-2405, April.
    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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    More about this item

    Keywords

    Information discreteness; Earnings momentum; Price limits; Limited investor attention; Taiwan stock market;
    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

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