The Moving Average Ratio and Momentum

I show the ratio of the short‐term moving average to the long‐term moving average (moving average ratio, MAR) has significant predictive power for future returns. The MAR combined with nearness to the 52‐week high explains most of the intermediate‐term momentum profits. This suggests that an anchoring bias, in which investors use moving averages or the 52‐week high as reference points for estimating fundamental values, is the primary source of momentum effects. Momentum caused by the anchoring bias do not disappear in the long‐run even when there are return reversals, confirming that intermediate‐term momentum and long‐term reversals are separate phenomena.     

Momentum in weekly returns: the role of intermediate‐horizon past performance

Gutierrez and Kelly (2008) recently documented momentum in weekly returns. Using the Australian market as a setting, we find that stocks with high 1‐week returns exhibit a continuation in returns up to 1 year after a brief initial return reversal. However, after controlling for the intermediate‐horizon past performance, the continuation in returns after 1‐week returns disappears. These findings suggest that different past investment horizons contain separate information about price momentum and that intermediate‐term trends dominate short‐term trends in driving future returns. Overall, we show that understanding momentum over different horizons facilitates the design of more profitable trading strategies.     

Price Momentum and Idiosyncratic Volatility

We find that returns to momentum investing are higher among high idiosyncratic volatility ( IVol) stocks, especially high IVol losers. Higher IVol stocks also experience quicker and larger reversals. The findings are consistent with momentum profits being attributable to underreaction to firm‐specific information and with IVol limiting arbitrage of the momentum effect. We also find a positive time‐series relation between momentum returns and aggregate IVol. Given the long‐term rise in IVol, this result helps explain the persistence of momentum profits since Jegadeesh and Titman's (1993) study.     

The Long-Lasting Momentum in Weekly Returns

Reversal is the current stylized fact of weekly returns. However, we find that an opposing and long‐lasting continuation in returns follows the well‐documented brief reversal. These subsequent momentum profits are strong enough to offset the initial reversal and to produce a significant momentum effect over the full year following portfolio formation. Thus, ex post, extreme weekly returns are not too extreme. Our findings extend to weekly price movements with and without public news. In addition, there is no relation between news uncertainty and the momentum in 1‐week returns.     

Momentum and Reversals in Equity-Index Returns During Periods of Abnormal Turnover and Return Dispersion

We document new patterns in the dynamics between stock returns and trading volume. Specifically, we find substantial momentum (reversals) in consecutive weekly returns when the latter week has unexpectedly high (low) turnover. This pattern is evident in equity indices, index futures, and individual stocks. Similarly, we also find that the autocorrelation in equity‐index returns is increasing with the unexpected dispersion across the latter week's firm‐level returns. Weeks with extreme turnover and dispersion shocks (both high and low) tend to have more macroeconomic news releases. Our findings bear on understanding price formation and the economic interpretation of turnover and dispersion shocks.     

The 52-week high strategy and information uncertainty

This paper examines the driver of the 52-week high strategy, which is long in stocks close to their 52-week high price and short in stocks with a price far below their one-year high, and tests the hypothesis that this strategy’s profitability can be explained by anchoring—a behavioral bias. To test the null, we examine whether the 52-week high criterion has more predictive power in cases of larger information uncertainty. This hypothesis is based on the psychological insight that behavioral biases increase in uncertainty. For six proxies of ambiguity, we document a positive relationship to returns of 52-week high winner stocks and a negative relationship to returns of 52-week high loser stocks. The opposite effect of information uncertainty on winner and loser stocks implies that the 52-week high profits are increasing in uncertainty measures. Moreover, the study documents that the six variables have a similar impact on momentum profits. Hence, we cannot reject the hypothesis that anchoring explains the profits of the 52-week high strategy and that it is the driver of the momentum anomaly.     

Reference Point Theory and Pursuit of Deals

Target and bidder reference points have separate and joint effects on merger deals. A firm whose stock price is more distant from its 52‐week high reference point is less likely to attract bids but has a greater likelihood of being acquired by its own managers (vs unaffiliated bidders). Firm propensity to submit a bid increases if its prevailing stock price is closer to its 52‐week high. When both parties’ reference points are close to their current stock prices, they are more willing to complete a deal. Hostile deals result when the bidder's stock price is closer to its reference point.     

Analysts’ Momentum Recommendations

We document that the likelihood of analyst recommendations following past stock returns decreased abruptly in 2003, coinciding with the Global Settlement and other regulatory changes designed to restrain analysts’ conflicts of interest. We also document that the likelihood of recommendations following past stock returns is abnormally high for recommendations issued after negative stock returns (but not for those issued after positive stock returns), among inexperienced and inaccurate analysts, among large brokerage houses, and for companies with high share turnover. Moreover, the recommendations that are more likely to follow past stock returns are accompanied by earnings forecast revisions that are larger in magnitude and less accurate ex post. Overall, our findings suggest that analysts with conflicts of interest and limited ability are more likely to base their recommendations on past stock returns. Finally, we document that the recommendations that are more likely to follow past stock returns (especially those that were issued before 2003 and those that are issued after negative stock returns) contribute to existing price momentum by generating incrementally stronger short‐term and long‐term stock returns.     

Letting Go of Norm: How Executive Compensation Can Do Better Than "Best Practices"

With executive pay under the media spotlight, the corporate search for “best practices” is in reality a drive toward common practices as cautious boards gravitate toward a safe norm. But are current trends in compensation structure as good for shareholders as they are for the consultants who implement them? This article explores some of these trends and derives some conclusions about their role in shareholder value creation based on detailed data on executive plans and stock price performance for the S&P 500. One key finding is that rewarding managers for profit growth produces higher stock price returns than rewards based on multiple measures or balanced scorecards. Also, the popular practice of adding long‐term incentive plans to the compensation mix does not appear to improve long‐term performance. Finally, the granting of equity based on the past year's performance rather than in annual fixed‐value amounts appears to be good for shareholders because of additional incentives created by performance‐based grants as well as the elimination of the perverse incentive of rewarding poor stock price performance with more shares.     

The timing of 52-week high price and momentum

We propose a new momentum strategy based on the timing of a stock’s 52-week high price. We find that the stocks that attained the 52-week high price in the recent past significantly outperform the stocks that attained the 52-week high price in the distant past. In particular, the top 10% of the stocks with the most recent 52-week high price outperform the bottom 10% of the stocks with most distant 52-week high price by 0.70% per month. Further, conditioning on the recency of 52-week high price significantly increases the profitability of momentum strategy based on the nearness of current price to the 52-week high price. Specifically, the average monthly return of this strategy is about twice as large for stocks with recent 52-week high price as compared with stocks with distant 52-week high price.     

DIVERGENCE OF OPINION AND LONG‐TERM PERFORMANCE OF INITIAL PUBLIC OFFERINGS

Miller's hypothesis posits that divergence of opinion can lead to asset overvaluation and subsequent long‐term underperformance in markets (such as initial public offerings [IPOs]) with restricted short‐selling. Consistent with this hypothesis, we find that early‐market return volatility, a proxy for divergence of opinion, is negatively related to subsequent IPO long‐term abnormal returns. This relation holds after accounting for other factors that previous studies suggest affect long‐term abnormal returns for IPOs (including another proxy for divergence of opinion). Moreover, we find that this relation is stronger in IPO markets than in non‐IPO markets (where short‐selling restrictions are less stringent), again consistent with Miller's hypothesis.     

Expected Mispricing: The Joint Influence of Accounting Transparency and Investor Base

We examine how accounting transparency and investor base jointly affect financial analysts' expectations of mispricing (i.e., expectations of stock price deviations from fundamental value). Within a range of transparency, these two factors interactively amplify analysts' expectations of mispricing—analysts expect a larger positive deviation when a firm's disclosures more transparently reveal income‐increasing earnings management and the firm's most important investors are described as transient institutional investors with a shorter‐term horizon (low concentration in holdings, high portfolio turnover, and frequent momentum trading) rather than dedicated institutional investors with a longer‐term horizon (high concentration in holdings, low portfolio turnover, and little momentum trading). Results are consistent with analysts anticipating that transient institutional investors are more likely than dedicated institutional investors to adjust their trading strategies for near‐term factors affecting stock mispricings. Our theory and findings extend the accounting disclosure literature by identifying a boundary condition to the common supposition that disclosure transparency necessarily mitigates expected mispricing, and by providing evidence that analysts' pricing judgments are influenced by their anticipation of different investors' reactions to firm disclosures.     

An Empirical Analysis of Analysts' Target Prices: Short-term Informativeness and Long-term Dynamics

Using a large database of analysts' target prices issued over the period 1997–1999, we examine short‐term market reactions to target price revisions and long‐term comovement of target and stock prices. We find a significant market reaction to the information contained in analysts' target prices, both unconditionally and conditional on contemporaneously issued stock recommendation and earnings forecast revisions. Using a cointegration approach, we analyze the long‐term behavior of market and target prices. We find that, on average, the one‐year‐ahead target price is 28 percent higher than the current market price.     

Reversal and momentum patterns in weekly stock returns: European evidence

We analyze short‐term reversal and medium‐term momentum patterns in weekly stock returns in Europe. Focusing on raw and stock‐specific returns, our empirical results show for both return specifications (a) a negative relation between weekly past returns and future returns in the short run and (b) a positive relation in the medium run. However, returns from reversal and momentum strategies based on stock‐specific returns are less volatile. In further analyses, we find short‐term reversal and medium‐term momentum patterns to be connected to stock characteristics. Looking at the potential causes of these effects, our results do not support the idea that short‐term reversal in weekly stock returns is due to an over‐ or underreaction to firm‐specific news nor that it is mainly driven by illiquidity. Medium‐term momentum in weekly stock returns, on the other hand, can be connected to behavioral biases. Our concluding tests confirm that our findings are robust among industries, in subperiods, for the January effect and in varying market states. Finally, while medium‐term momentum strategies remain profitable after accounting for transaction costs, short‐term reversal strategies can be mainly explained by transaction costs due to their high turnover.     

Commodities momentum: A behavioral perspective

The growth in commodity-related investments has sparked interest in the performance of momentum strategies in these markets. This paper introduces a behavioral proxy of the 52-week high and low momentum that explains a significant proportion of the variation of conventional momentum returns after controlling for commodity specific risk factors. Our findings show that the 52-week high strategy generates significant profits after accounting for transaction costs. We report that the 52-week high strategy is a better predictor of returns than conventional momentum. Our findings suggest that term structure and hedging pressure risk factors provide only a partial explanation of the results.     

How Much Is Too Much: Are Merger Premiums Too High?

Is it too much to pay target firm shareholders a 50% premium on top of market price? Or is it too much to pay a 100% premium when pursuing mergers and acquisitions? How much is too much? In this paper, we examine how the extent of merger premiums paid impacts both the long‐run and announcement period stock returns of acquiring firms. We find no evidence that acquirers paying high premiums underperform those paying relatively low premiums in three years following mergers, and the result is robust after controlling for a variety of firm and deal characteristics. Short term cumulative abnormal returns are moreover positively correlated to the level of the premium paid by acquirers. Our evidence therefore suggests that high merger premiums paid are unlikely to be responsible for acquirers' long‐run post merger underperformance.     

What Drives Target Price Forecasts and Their Investment Value?

This paper examines the informativeness of analysts’ target price forecasts by relating the investment value of target prices to their primary drivers. Decomposing target price forecasts into near‐term earnings forecasts and price‐to‐earnings ratio forecasts, we show that target price revisions reflect information from both components. In addition, we also find that the relative importance of each component in target price revisions is related to firm characteristics. A portfolio based on target price implied expected returns delivers significant abnormal returns. More importantly, we find that the abnormal returns are associated with both earnings and price‐to‐earnings forecasts, which suggests that the informativeness of target price forecasts comes not only from analysts’ ability to forecast short‐term earnings but also from their ability to assess risk and long‐term growth prospect implied in price‐to‐earnings forecasts.     

The 52-week high,momentum, and predicting mutual fund returns

George and Hwang (J Finance 59:2145–2176, 2004) have shown that the 52-week high share price carries significant predictive ability for individual stock returns, dominating other common momentum-based trading strategies. Based upon their results and other methods, this paper examines and compares the performance of three momentum trading strategies for mutual funds, including an analogous 1-year high measure for the net asset value of mutual fund shares. Strategies based on prior extreme returns and on fund exposure to stock return momentum are also examined. Results show that all three measures have significant, independent, predictive ability for fund returns. Further, each produces a distinctive pattern in momentum profits, whether measured in raw or risk-adjusted returns, with profits from momentum loading being the least transitory. Nearness to the 1-year high and recent extreme returns are significant predictors of fund monthly cash flows, whereas fund momentum loading is not.     

Oil Risk Exposure: The Case of the U.S. Oil and Gas Sector

We estimate oil price risk exposures of the U.S. oil and gas sector using the Fama‐French‐Carhart's four‐factor asset pricing model augmented with oil price and interest rate factors. Results show that the market, book‐to‐market, and size factors, as well as momentum characteristics of stocks and changes in oil prices are significant determinants of returns for the sector. Oil price risk exposures of U.S. oil and gas companies in the oil and gas sector are generally positive and significant. Our study also finds that oil price risk exposures vary considerably over time, and across firms and industry subsectors.     

From Stock Selection to Portfolio Alpha Generation: The Role of Fundamental Analysis

In this roundtable sponsored by Columbia Business School's Center for Excellence in Accounting Research and Security Analysis, a group of successful investors discuss their approaches and methods. A common saying among financial economists is that stock prices are set not by the average investor, but “at the margin” by the most sophisticated and influential investors. The intent of this roundtable is to furnish a portrait of such “marginal” investors, one that turns out to be quite different from the quarterly earnings‐driven, momentum traders often depicted by the media and deplored by corporate executives. In response to the common charge of short termism leveled by corporate managers, most of the investors at the table claimed to take large, multi‐year positions in companies they believed to be well‐managed, but temporarily undervalued. Instead of being attracted to earnings momentum, and rather than simply capitalizing current earnings at industry‐wide multiples to arrive at price targets, the analysis of these investors begins with a “deep dive” into a company's financials, which is often reinforced by primary research—visits with management, customers, suppliers. The aim of such research is to identify, well before the broad market does, companies that promise to earn consistently high and sustainable returns on invested capital.