The Value of Growth: Changes in Profitability and Future Stock Returns

Sotes-Paladino, Juan M.; Wang, Jiaguo; Yao, Yaqiong

doi:10.2139/ssrn.2819183

Cited by 3 publications

(1 citation statement)

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“…This result can also be attributed to underreaction-based explanations for momentum, as high dispersion in analyst earnings forecasts is associated with greater investor disagreement, which in turn leads prices to underreact to fundamental news. More recently, Novy-Marx (2015) and Sotes-Paladino, Wang, and Yao (2017) suggest that news about fundamentals is a major determinant of momentum returns by showing that momentum is explained by earnings surprises and profitability growth, respectively. We build on this literature by arguing that investor myopia provides an explanation for why investors underreact to fundamental news and by testing the relationship between myopia and momentum returns.…”

Section: Literature Reviewmentioning

confidence: 99%

Investor Myopia and the Momentum Premium across International Equity Markets

Docherty

Hurst

2018

J. Financ. Quant. Anal.

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Myopic investors focus on short-run price changes rather than long-term fundamental value, resulting in an overweighting of public information and a slow diffusion of fundamental news. Such processing of information can produce price drifts similar to those seen in behavioral models of momentum. We explore the impact of myopia over an international sample, finding that momentum is stronger in more myopic countries, and this relationship is magnified where the proportion of funds under delegated management is high. We therefore argue that investor myopia, which arises due to agency issues in delegated funds management, is an important determinant of momentum.

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Section: Literature Reviewmentioning

confidence: 99%