Events

Finance Seminar

Authors:

• Zhi Da
  University of Notre Dame

• Umit G. Gurun
  University of Texas at Dallas

• Mitch Warachka
  Singapore Management University

We develop and test a frog-in-the-pan (FIP) 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 and construct an information discreteness measure to capture the intensity of firm-level information flows. In contrast to most firm characteristics that explain return continuation, information discreteness is not persistent. Consistent with our FIP hypothesis, we find that continuous information induces stronger and more persistent return continuation that does not reverse in the long run. 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 but similar cumulative formation-period returns. The ability of continuous information to explain return continuation is not attributable to the disposition effect.