Earnings Momentum Strategies Research Articles

Earnings Momentum in International Markets

This paper examines the profitability of earnings momentum strategies based on analyst forecast revisions in eleven international equity markets. While analyst forecast revisions exhibit persistence in all countries, the profitability of trading strategies based on these revisions varies. Specifically, earnings momentum yields significant profits in Australia, Canada, France, Germany, Hong Kong, and the United Kingdom, but not in Malaysia, South Korea, Japan, Singapore, or Taiwan. Interestingly, price momentum exists only in those countries where earnings momentum is profitable. In general, markets with high levels of corruption (low investor protection) exhibit weak momentum. Collectively, these findings suggest that the momentum phenomenon is related to information dissemination mechanisms within a country.

Momentum profits, market cycles, and rebounds: Evidence from Germany

Abstract Recent evidence shows that U.S. price momentum strategies suffer tremendous losses in times of highly volatile market recoveries. We extend the existing literature by analyzing the performance of both price and earnings momentum portfolios across different market states. For our German sample, we find that the long–short price momentum strategy loses almost 9% per month during market rebounds. This so-called momentum crash is solely due to recovering loser stocks. After a prolonged bear market hits bottom, the loser portfolio is mostly composed of highly volatile and leveraged small-cap stocks, which have lost nearly 83% of their market value over the preceding year and are thus susceptible to heavy rebounds. Interestingly, the momentum crash phenomenon seems to disappear once we control for exposures to the Fama–French factors, with the market factor being the most relevant. By contrast, earnings momentum strategies are less affected by market rebounds and also consistently outperform price momentum strategies on a risk-adjusted basis.

Price and Earnings Momentum, Transaction Costs, and an Innovative Practitioner Technique

We use an innovative practitioner technique to investigate the interplay between the ex post performance of momentum strategies and transaction costs, rebalancing frequency, turnover constraints, and fund size. We have three interrelated main results: first, the level of and correlation between active returns to price momentum and earnings momentum strategies vary dramatically with these factors; second, strategies that are fearful of ex ante transaction costs generate returns net of transaction costs that are far superior to the net returns of naive strategies; and third, obtaining better traction with the unique elements of each strategy yields a more profitable combined strategy.

Individualism, Uncertainty Avoidance, and Earnings Momentum in International Markets

AbstractThis study examines whether cultural dimensions such as individualism and uncertainty avoidance can explain the variation in the profitability of the earnings momentum strategies in international markets. Using the time‐varying cultural indices of Tang and Koveos (2008) for 30,383 firms from 41 countries over the period 1995–2008, we show that the level of individualism in a country is positively associated and the level of uncertainty avoidance is negatively associated with earnings momentum profits. Our findings are robust to the inclusion of a comprehensive set of control variables and alternative cultural metrics. The central message is that we emphasize the necessity to go beyond the assumption of perfect rationality and to account for innate differences among international investors to explain how accounting information is incorporated into stock prices. We recommend that cultural dimensions be included in cross‐country research to account for innate differences among international investors.

Momentum Profits, Market Cycles, and Rebounds: Evidence from Germany

Recent evidence shows that U.S. price momentum strategies suffer tremendous losses in times of highly volatile market recoveries. We extend the existing literature by analyzing the performance of both price and earnings momentum portfolios across different market states. For our German sample, we find that the long-short price momentum strategy loses almost 9% per month during market rebounds. This so-called momentum crash is solely due to recovering loser stocks. After a prolonged bear market hits bottom, the loser portfolio is mostly composed of highly volatile and leveraged small-cap stocks, which have lost nearly 83% of their market value over the preceding year and are thus susceptible to heavy rebounds. Interestingly, the momentum crash phenomenon seems to disappear once we control for exposures to the Fama-French factors, with the market factor being the most relevant. By contrast, earnings momentum strategies are less affected by market rebounds and also consistently outperform price momentum strategies on a risk-adjusted basis.

The Relationship between Earnings Momentum and Price Momentum in Different Market - The Case of the China Market

This study focuses on the stocks that are listed in A- and H-share markets from January 2000 to December 2009. Following Chan, Jegadeesh and Lakonishok (1996), we test the profitability of price momentum and earnings momentum strategies under different market systems and accounting standards. In addition, we also adopt the method documented by Chordia and Shivakuma (2006) to examine whether earnings momentum and price momentum are related. The empirical results show that the price momentum effect has a significant and persistent phenomenon in H-share market instead of A-share market. Besides, the earnings momentum strategy would generate a significantly positive return in each market. This implies that the difference of accounting information content between the two markets does not inflect the profitability of earnings momentum strategy. Due to the price momentum strategy have an insignificant return in the A-share market, we only focus on the discussion of relationship between earnings and price momentum in H-shares. From the results, we find that price momentum is captured by the earnings momentum. The predictive power of past returns is subsumed by a strategy that buying the highest earnings surprise portfolio and selling the lowest earnings surprise portfolio.

Enhancing the profitability of earnings momentum strategies: the role of price momentum, information diffusion and earnings uncertainty

Recent literature indicates that stock characteristics proxying for behavioral biases reinforce the earnings momentum effect – the price drift following analysts’ earnings forecast revisions. Using data from the German HDAX, we analyze the impact of price momentum, the rate of information diffusion and earnings uncertainty on the returns of earnings momentum strategies. We find that the rate of information diffusion has the strongest and most unambiguous impact, going beyond the effect of simply sorting stocks into more extreme revision portfolios. A bivariate sort on earnings momentum and market capitalization yields gross Carhart alphas of up to 22% per year. Our results are robust to reasonable levels of trading costs. As trading costs increase, however, there is some evidence that longer holding period strategies with lower gross returns become more favorable.

Are good-news firms riskier than bad-news firms?

This paper examines the relative risk of good-news firms, i.e., those with high standardized unexpected earnings (SUE), and bad-news (low SUE) firms using a stochastic discount factor approach. We find that a stochastic discount factor constructed from a set of basis assets helps explain post-earnings-announcement drift (PEAD). The risk exposures on the pricing kernel increase monotonically from the lowest to highest SUE sorted portfolios. Specifically, good-news firms always have higher risk exposures than bad-news firms in both 10 SUE sorted portfolios and 25 size and SUE sorted portfolios. However, the estimated expected risk premium is too small to explain the observed magnitude of returns on the PEAD strategy. Our risk adjustment can explain only about one-fourth of the total magnitude of the average realized return to the PEAD strategy. As a result, the average risk-adjusted returns of earnings momentum strategies are mostly positive and significant. Overall, our results support the view that at least some portion of the returns to the earnings momentum strategies examined represent compensation for bearing increased risk.

Enhancing the Profitability of Earnings Momentum Strategies: The Role of Price Momentum, Information Diffusion and Earnings Uncertainty

Recent literature indicates that stock characteristics proxying for behavioral biases reinforce the earnings momentum effect. Using data from the investable German HDAX, we analyze whether returns of earnings momentum strategies can be enhanced in a way that not only survives common risk adjustments but also maintains profitability after trading costs. For our liquid stock universe, we find that the rate of information diffusion has the strongest impact. A bivariate sort on earnings momentum and market capitalization yields gross Carhart alphas of up to 22% per year. The abnormal returns are largely robust to reasonable levels of trading costs.

Individualism, Uncertainty Avoidance and the Profitability of Momentum Strategies in International Markets

Prior research shows that momentum returns are unlikely to be explained by risk-based theories. Daniel, Hirshleifer, and Subrahmanyam (1998) show that momentum effect can be explained by investors overconfidence and self-attribution bias while Barberis, Shleifer, and Vishny (1998) and Hong and Stein (1999) document that momentum effect can be explained by investors under-reaction to information. Chui et al. (2010) document that cultural differences influence the returns of momentum strategies. Motivated by these studies, we examine the relationship between cognitive biases and the profitability of price and earnings momentum strategies in international markets. Specifically, we address two questions. First, we investigate the relationship between individualism, uncertainty avoidance and price momentum returns. Second, we investigate the relationship between individualism, uncertainty avoidance and earnings momentum returns. Using data from 41 countries we show that (1) the level of individualism in different countries is positively associated with the profitability of price and earnings momentum strategies, (2) the degree of uncertainty avoidance is negatively associated with the earnings momentum profits, but not correlated with price momentum profits. Collectively, our findings suggest that the variation in the profitability of price and earnings momentum strategies can be attributed to cognitive biases.

A Tale of Two Anomalies: The Implications of Investor Attention for Price and Earnings Momentum

We examine the role of investor attention in explaining the profitability of price and earnings momentum strategies. Using trading volume and market state to measure cross-sectional and time-series variations of investor attention, we find that price momentum profits are higher among high volume stocks and in up markets, but that earnings momentum profits are higher among low volume stocks and in down markets. In the long run, price momentum profits reverse but earnings momentum profits do not. These results suggest that price underreaction to earnings news weakens with investor attention, but price continuation caused by investors' overreaction strengthens with attention.

Insights into the Momentum Life Cycle for European Stocks

This article evaluates price and earnings momentum strategies constructed using either single or multiple criteria not only to establish how these strategies performed in the major European markets over the last 15 years but also to enhance our knowledge as to how to place a stock in its momentum life cycle. In terms of performance, we established that price momentum strategies outperformed earnings momentum strategies but that they complemented each other when combined. We also established means for enhancing both price and earnings momentum strategies and determined what combination of price momentum with enhanced earnings momentum produced the best results both at the country/region level and the aggregated level. These findings suggest that the earnings forecasts made by the equity analysts provide a good indication as to the positioning of a stock in its momentum life cycle. However, subsequent analysis established that this is only true for wining stocks and that these forecast provide no incremental information when it comes to predicting the future performance of losing stocks over the holding periods considered. <b>TOPICS:</b>Developed, portfolio management/multi-asset allocation

Dispersion in Analyst Forecasts and the Profitability of Earnings Momentum Strategies

This paper shows that the dispersion in analysts’ consensus forecasts contains incremental information to predict future stock returns. Consistent with prior research, stock prices in the German market underreact to news about future earnings and drift in the direction suggested by analysts’ forecasts revisions. Even higher abnormal returns can be achieved by applying such an earnings momentum strategy to stocks with a low dispersion in analyst forecasts. These results support one of the recent behavioural models in which investors underweight new evidence and conservatively update their beliefs in the right direction, but by too little in magnitude with respect to more objective information.

Earnings Momentum Strategies and the Macroeconomy

This paper documents that earnings momentum strategies are systematically related to the macroeconomy. The returns to these strategies are predictable by standard macroeconomic and aggregate financial market variables. What's more, a significant fraction of the variation in the profits to these strategies appears to be negatively associated with news about macroeconomic aggregates such as industrial production growth and consumption growth. Existing explanations for the earnings momentum phenomenon, whether rational or behavioral, have difficulty explaining all of these facts.

Dispersion in Analyst Forecasts and the Profitability of Earnings Momentum Strategies

It is a well documented phenomenon that stock prices underreact to news about future earnings and drift in the direction suggested by revisions in analysts' earnings forecasts. This paper shows that the dispersion in analysts' consensus forecasts contains incremental information to predict future stock returns. Higher abnormal returns can be achieved by applying an earnings momentum strategy to stocks with a low dispersion. This finding supports one of the recent behavioral models in which investors focus too little on the weight of new evidence and conservatively update their beliefs in the right direction, but by too little in magnitude with respect to more objective information.

The Profitability of Momentum Strategies

Momentum strategies based on continuations in stock prices have attracted a wide following among money managers and investors. We evaluated the profitability of price momentum strategies based on past return and earnings momentum strategies based on standardized unexpected earnings and revisions of consensus forecasts. The strategies proved to be profitable for intermediate horizons. Chasing momentum can generate high turnover, however; hence, implementation of momentum strategies requires a focus on managing trading costs. Comparing the strategies yielded evidence that they reflect distinct phenomena and provided information about the sources of profits. The results indicate that the market is slow to incorporate the full impact of information in its valuations.