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The role of firm investment in momentum and reversal

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  • Mortal, Sandra C.
  • Schill, Michael J.

Abstract

We propose that the time delay inherent in firm investment is what creates the time delay in stock returns observed in the momentum and reversal regularities. We provide intuition for our hypothesis and show empirically that indeed the momentum and reversal effects occur not in isolation, but are concurrent with systematic patterns in firm investment. For example, winners only continue to win when there is also subsequent investment, and losers only continue to lose when there is also subsequent disinvestment. Although our paper is about understanding the nature of the price pattern delay rather than examining a trading strategy, our tests suggest ways to enhance trading returns. Our results provide novel evidence on a potential source of delay in momentum and reversals regularities.

Suggested Citation

  • Mortal, Sandra C. & Schill, Michael J., 2018. "The role of firm investment in momentum and reversal," Journal of Empirical Finance, Elsevier, vol. 48(C), pages 255-278.
  • Handle: RePEc:eee:empfin:v:48:y:2018:i:c:p:255-278
    DOI: 10.1016/j.jempfin.2018.07.001
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