Momentum returns and information uncertainty: Evidence from China

• Differences in behavioural biases induced by culture could condition the effect of IU on future and momentum returns.
• Momentum effect in China is weaker than in the U.S.
• Higher IU in China does not necessarily result in lower future returns unlike in the U.S.
• Higher IU in China does not necessarily result in higher momentum returns unlike in the U.S.

A recent theory of information uncertainty (IU) postulates a negative (positive) relationship between IU and future returns (momentum returns). We extend this theory by showing that its predictions could be conditioned by differences in behavioral biases induced by culture. We find that greater IU does not necessarily result in lower future returns in China unlike in the U.S. In fact for some IU proxies, high IU firms have higher future returns. Second, we confirm earlier evidence of a weak momentum effect in the Chinese stock market which is consistent with the low level of individualism among Chinese investors reported in the literature. Third we find that momentum returns of firms with greater IU are not necessarily higher than firms with lower IU.