Frog in the Pan: Continuous Information and Momentum

• Main Authors: Da, Zhi, Gurun, G., WARACHKA, Mitchell Craig
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2012
• Subjects: Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/1792; https://ink.library.smu.edu.sg/context/lkcsb_research/article/2791/viewcontent/WarachkaMFroginthePan.pdf
• Institution: Singapore Management University

We develop and test a frog-in-the-pan hypothesis that predicts investors are less attentive to information arriving continuously in small amounts than to information with the same cumulative stock price implications arriving in large amounts at discrete timepoints. Intuitively, we hypothesize that a series of gradual frequent changes attracts less attention than infrequent dramatic changes. Consistent with our frog-in-the-pan hypothesis, we find strong evidence that continuous information induces stronger and more persistent return continuation. Over a six-month holding period, momentum decreases monotonically from 8.86% for stocks with continuous information during their formation period to 2.91% for stocks with discrete information. Higher media coverage and higher analyst coverage are associated with more discrete and more continuous information, respectively.