Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies


  • Harrison Hong,

  • Terence Lim,

  • Jeremy C. Stein

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    • Hong is from the Stanford Business School, Lim is from Goldman Sachs, and Stein is from the MIT Sloan School of Management and the National Bureau of Economic Research. This research is supported by the National Science Foundation and the Finance Research Center at MIT. We are grateful to Joseph Chen for research assistance and to Ken French, Paul Pfleiderer, Geert Rouwenhorst, David Scharfstein, Ken Singleton, René Stulz, three anonymous referees, and seminar participants at MIT, Yale, UCLA, Berkeley, Stanford, Illinois, the Norwegian School of Management, and the Stockholm School of Economics for helpful comments and suggestions. Data on analyst coverage were provided by I/B/E/S Inc. under a program to encourage academic research. Thanks also to Lisa Meulbroek for sharing the data on options listings.


Various theories have been proposed to explain momentum in stock returns. We test the gradual-information-diffusion model of Hong and Stein (1999) and establish three key results. First, once one moves past the very smallest stocks, the profitability of momentum strategies declines sharply with firm size. Second, holding size fixed, momentum strategies work better among stocks with low analyst coverage. Finally, the effect of analyst coverage is greater for stocks that are past losers than for past winners. These findings are consistent with the hypothesis that firm-specific information, especially negative information, diffuses only gradually across the investing public.