Various theories have been proposed to explain momentum in stock returns. We test the gradual-information-diffusion model of Hong and Stein (1999) and establish three key results. First, once one moves past the very smallest stocks, the profitability of momentum strategies declines sharply with firm size. Second, holding size fixed, momentum strategies work better among stocks with low analyst coverage. Finally, the effect of analyst coverage is greater for stocks that are past losers than for past winners. These findings are consistent with the hypothesis that firm-specific information, especially negative information, diffuses only gradually across the investing public.SEVERAL RECENT PAPERS HAVE DOCUMENTED that, a t medium-term horizons ranging from three to 12 months, stock returns exhibit momentum-that is, past winners continue to perform well, and past losers continue to perform poorly. For example, Jegadeesh and Titman (1993), using a U.S. sample of NYSE/ AMEX stocks over the period from 1965 to 1989, find that a strategy that buys past six-month winners (stocks in the top performance decile) and shorts past six-month losers (stocks in the bottom performance decile) earns approximately one percent per month over the subsequent six months. Not only is this an economically interesting magnitude, but the result also appears to be robust: Rouwenhorst (1998) obtains very similar numbers in a sample of 12 European countries over the period from 1980 to 1995.l * Hong is from the Stanford Business School, Lim is from Goldman Sachs, and Stein is from the MIT Sloan School of Management and the National Bureau of Economic Research. This research is supported by the National Science Foundation and the Finance Research Center at MIT. We are grateful to Joseph Chen for research assistance and to Ken French, Paul Pfleiderer, Geert Rouwenhorst, David Scharfstein, Ken Singleton, Rene Stulz, three anonymous referees, and seminar participants at MIT, Yale, UCLA, Berkeley, Stanford, Illinois, the Norwegian School of Management, and the Stockholm School of Economics for helpful comments and suggestions. Data on analyst coverage were provided by I/B/E/S Inc. under a program to encourage academic research. Thanks also to Lisa Meulbroek for sharing the data on options listings.' Rouwenhorst (1997) finds that momentum strategies also earn significant profits on average in a sample of 20 emerging markets. See Haugen and Baker (1996) for confirmatory evidence from the United States and several European countries.