Title page for ETD etd-05092008-141032

Type of Document Dissertation
Author Bhootra, Ajay
Author's Email Address abhootra@vt.edu
URN etd-05092008-141032
Title Two Essays on Momentum and Reversals in Stock Returns
Degree PhD
Department Finance, Insurance, and Business Law
Advisory Committee
Advisor Name Title
Cliff, Michael T. Committee Chair
Gulen, Huseyin Committee Member
Kadlec, Gregory B. Committee Member
Kumar, Raman Committee Member
  • underreaction
  • reversals
  • composite share issuance
  • locked-in capital gain taxes
  • intangible information
  • momentum
  • delayed overreaction
Date of Defense 2008-05-01
Availability unrestricted
This dissertation consists of two essays. In the first essay, I examine the source of momentum in stock returns. The reversal of momentum returns has been interpreted as evidence that momentum results from delayed overreaction to information. I examine momentum and reversals conditional on firms’ share issuance (net of repurchases) during the momentum holding period and show that (1) among losers, the momentum returns are statistically significant, but the reversals are non-existent, for both issuers and non-issuers; (2) among winners, momentum and reversals are restricted to issuers, but are non-existent among non-issuers. After further conditioning on firm size, I find that winner reversals are restricted to small, equity issuing firms. After excluding these small issuers from the sample, the remaining firms have strong momentum profits with no accompanying reversals. The evidence suggests that the return reversals are a manifestation of the poor performance of equity issuing firms. Further, while investor overreaction potentially contributes to the momentum among winners, a large fraction of firms do not earn any significant abnormal returns following initial price continuation, suggesting that underreaction, and not delayed overreaction to information, is the dominant source of momentum in stock returns.

In the second essay, I examine alternative explanations of reversals in stock returns. George and Hwang (2007) find that long-term reversals in stock returns are driven by investors’ incentive to defer payment of taxes on locked-in capital gains rather than by overreaction to information. I show that return reversals are instead attributable to the negative relationship between firms’ composite share issuance and future stock returns documented in Daniel and Titman (2006). The ability of locked-in capital gains measures to forecast stock returns is largely subsumed by the composite share issuance measure. My results do not support the hypothesis that capital gains taxes drive long-term return reversals.

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