Price and earnings momentum: An explanation using return decomposition

Mike Qinghao Mao and K.C. John Wei

Journal of Empirical Finance, 2014, vol. 28, issue C, 332-351

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.

Keywords: Return decomposition; Cash flow news; Discount rate news; Price momentum; Earnings momentum (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 M40 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:28:y:2014:i:c:p:332-351

DOI: 10.1016/j.jempfin.2014.04.003

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