Examination of the interaction of stock return momentum with various earnings
measures finds that large-capitalization companies with poor past returns and
high return on equity (ROE) significantly underperform the market and companies
with poor past returns and low ROE. Thus, the profitability of high-ROE
companies with poor past returns may have peaked. In addition, companies with
poor past returns and poor earnings quality (as measured by accruals)
significantly underperform the market and companies with poor past returns and
good earnings quality. Therefore, the market may not fully recognize
manipulation of earnings. The findings are consistent with the explanation that
momentum is driven by slow reaction to news.