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

A number of theories have been proposed to explain the medium-term momentum in stock returns identified by Jefadeesh and Titman (1993). We test one such theory based on the gradual-information-diffusion of Hong and Stein (1997)—and establish three key results. First, once one moves past the very smallest stocks (where thin market-making capacity appears to be an issue) the profitability of momentum strategies declines sharply with firm size. Second, holding size fixed, momentum strategies work particularly well among stocks which have low analyst coverage. Finally, there is a strong asymmetry: the effect of analyst coverage is much more pronounced for stocks that are past losers than for stocks that are past winners. These findings are consistent with the hypothesis that firm-specific information, especially negative information, diffuses only gradually across the investing public.