Abstract
Examination of the interaction of stock return momentum with various earnings measures finds that large-capitalization companies with poor past returns and high return on equity (ROE) significantly underperform the market and companies with poor past returns and low ROE. Thus, the profitability of high-ROE companies with poor past returns may have peaked. In addition, companies with poor past returns and poor earnings quality (as measured by accruals) significantly underperform the market and companies with poor past returns and good earnings quality. Therefore, the market may not fully recognize manipulation of earnings. The findings are consistent with the explanation that momentum is driven by slow reaction to news.
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