Investment-based momentum profits

In: NBER working paper series 16747

Abstract

"Momentum is consistent with value maximization of firms. The neoclassical theory of investment implies that expected stock returns are connected with expected marginal benefits of investment divided by marginal costs of investment. Winners have higher expected growth and expected marginal productivity (two major components of marginal benefits of investment), and consequently earn higher expected stock returns than losers. The investment-based model succeeds in capturing average momentum profits, reversal of momentum in long horizons, and the interaction of momentum with firm characteristics. However, the model fails to reproduce procyclical momentum profits. Overall, our evidence suggests that momentum can be understood within a framework in which markets are efficient and managers maximize the market value of equity"--National Bureau of Economic Research web site