The relation between earnings and price momentum: Does it vary across regimes?

Publication Title

Review of Quantitative Finance and Accounting

ISSN

0924865X

E-ISSN

15737179

Document Type

Article

Abstract

This paper investigates the time-varying relationship between earnings momentum and price momentum. Using a Markov-switching framework, allowing for variation between high volatility and low volatility states, we find that price momentum is significantly more influenced by earnings momentum in the high volatility state. Further for price momentum we find that loser firms display a higher degree of differential response to earnings momentum across the low and high volatility states than winner firms. Limited financing and investor sensitivity to future investment opportunities might explain these two results. Additional analysis indicates that loser firms tend to be more financially constrained. The results are robust using alternative instrument variables.

First Page

1145

Last Page

1213

Publication Date

4-1-2022

DOI

10.1007/s11156-021-01021-z

Keywords

Earnings momentum, Financial constraints, Markov regime-switching, Price momentum

Department

Department of Finance

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