“Frog in the Pan: Continuous Information and Momentum” by Zhi Da
University of Notre Dame
Umit G. Gurun
University of Texas at Dallas
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.