It’s All Overreaction: Earning Momentum to Value/Growth

2 Pages Posted: 19 Jun 2010 Last revised: 1 Dec 2011

Date Written: December 1, 2010

Abstract

In this paper, I examine whether consistent quarterly earnings signals generate momentum and subsequent return reversals. Conditioning on growth consistency in quarterly earnings, I show that an unbroken earnings string creates a strong financial momentum that peaks at the end of the first three months following the ranking period and then reverses over the next nine-month period. By the end of the first twelve months, this momentum has been completely dissipated. The magnitude of this price continuation and subsequent reversal are more pronounced for consistent high (low) growth firms than inconsistent good (bad) performers. This evidence shows securities markets in which stock prices systematically overreact to consistent earnings signals. As well, my finding suggests that the earning momentum and the value/glamour effect are likely to be empirically linked. These results are robust to the Fama-French three-factor model and the momentum factor as well as to earnings surprise effects and various robustness tests. Evidence reported in this study is consistent with the spirit of the behavioral models.

Keywords: Earnings signal consistency, Earnings momentum, Financial momentum, Price reversals, Investor overreactions, Investor psychology

JEL Classification: G12, G14, M41

Suggested Citation

Alwathainani, Abdulaziz M. and Alwathainani, Abdulaziz M., It’s All Overreaction: Earning Momentum to Value/Growth (December 1, 2010). CAAA Annual Conference 2011, Available at SSRN: https://ssrn.com/abstract=1626242 or http://dx.doi.org/10.2139/ssrn.1626242

Abdulaziz M. Alwathainani (Contact Author)

Alfaisal University ( email )

P.O. Box 50927
Riyadh, 11533
Saudi Arabia

York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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