Intangible returns, momentum, and investor psychology

I examine investors' reactions to private information to distinguish three behavioral models for momentum. I show that returns driven by private information are positively (negatively) correlated with future returns for the firms with rich (scarce) information environments. A long-short strategy designed to exploit this phenomenon yields monthly risk-adjusted returns of -74 bps and +60 bps among the smallest and largest quintile firms. The empirical pattern is robust to alternative definitions of firm information environment and proxies for private information. My results are consistent with an extended version of Daniel, Hirshleifer, and Subrahmanyam (1998) model with confirmation bias. Furthermore, the extended model explains the momentum pattern for the majority of firms in the market.