increases momentum profits. However, this result is also consistent with
the overconfidence hypothesis. Since there is less public information available
about the low analyst coverage stocks, one might expect relatively more
private information to be produced for these stocks. Daniel, Hirshleifer,
and Subrahmanyam (1998) suggest that overconfidence will be stronger
when there is more active collection of private information.
Daniel and Titman (1999) find that momentum profits are significantly
larger when the strategy is implemented with growth (low B/M) stocks than
with value (high B/M) stocks. Table 10.8, which we reproduce from Daniel
and Titman, shows that the momentum profits are not reliably different
from zero when implemented on stocks with the highest B/M ratios. The
growth stocks are perhaps harder to evaluate than value stocks. Psycholo-
gists report that individuals tend to be more overconfident about their ability
MOMENTUM 375Table 10.7
Monthly Returns for Portfolios Based on Price Momentum and Analyst CoverageThis table includes only stocks above the NYSE/AMEX 20th percentile. The mo-
mentum portfolios are formed based on six-month lagged raw returns and held for
6 months. The stocks are ranked in ascending order on the basis of six-month
lagged returns. Portfolio P1 is an equally-weighted portfolio of stocks in the worst
performing 30%, portfolio P2 includes the middle 40% and portfolio P3 includes
the best performing 30%. This table reports the average monthly returns (in per-
centages) of these portfolios and portfolios formed using an independent sort on
Model 1 analyst coverage residuals of log size and a NASDAQ dummy (see cited
paper). The least covered firms are in Sub1, the medium covered firms in Sub2, the
most covered firms in Sub3. Mean (median) size is in millions, and the t-statistics
are in parentheses.
Residual Coverage ClassPast All Stocks Low:Sub1 Medium:Sub2 High:Sub3 Sub1–Sub3
P1 0.62 0.27 0.67 0.97 −0.70
(1.54) (0.66) (1.70) (2.31) (−5.16)
P2 1.37 1.26 1.40 1.44 −0.18
(4.40) (4.20) (4.58) (4.29) (−2.11)
P3 1.56 1.40 1.58 1.69 −0.28
(4.35) (3.95) (4.52) (4.45) (−2.80)
P3 −P1 0.94 1.13 0.92 0.72 0.42
(4.89) (5.46) (4.64) (3.74) (3.50)
Mean Size 962 986 455
Median Size 103 200 180
Mean Analyst 1.5 6.7 9.7
Median Analyst 0.1 3.5 7.6
Source: Hong, Lim, and Stein (2000).