BAFI Research Seminar

Can Cash Flow Expectations Explain Momentum and Reversal?

Sponsored by: Dept. of Banking & Finance

Speaker(s): Zhongjin Lu, Columbia University

Date & Time: Wednesday, Feb. 19, 2014 from 10:30 a.m. to Noon

This paper uses the model-implied patterns of cash flow expectations to differentiate among the three most prominent behavioral theories explaining stock return momentum and reversal.  Using analyst earnings forecasts as a proxy for cash flow expectations, I trace the dynamics of the expectation errors for winner and loser stocks in a 24-month holding period, during which returns are characterized by a momentum phase followed by a reversal phase.  The large positive cross-sectional difference in expectation errors between winner and loser stocks gradually shrinks to zero over the holding period.  This pattern is most consistent with the underreaction hypothesis in Hong and Stein (1999), in which cash flow expectation errors can only explain momentum, and price extrapolation is needed to explain reversal.

Fee: [Yes/No/Varies]

Contact Information:
Tedda Nathan
Dept. Administrator
txn2@case.edu
216-368-2040
216-368-6249

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11119 Bellflower Road
Cleveland, OH 44106-7235
United States