Return Reversals
The explanation about price momentum provided in my paper "Corporate innovation and its effects on equity returns" (co-authored with Kodjo Apedjinou) is also consistent with the long-horizon return reversals. Check out the last table of the paper to see how corporate innovation of firms evolves over time. "Winners" underperform "losers" in 3-5 year horizons because they cannot keep up the high levels of corporate innovation in the long-run. Similarly, "losers" cannot waste scarce resources for too long, or they will go bankrupt. We show that although "losers" start out with much lower levels of corporate innovation than "winners", by the end of the 3-5 year holding period, they exhibit higher levels of corporate innovation than the "winners". This reversal in the relative levels of corporate innovation also explains the reversal in the returns.
