Information environment and investor behavior

Market reactions to non-fundamental news (or no-news) reverse for extreme firm information environments. A one percentage increase in intangible returns for small firms (large firms) lead to a 2.33% decrease (0.70% increase) in monthly returns over the next 12 months. The results are robust to firm characteristics adjustments, alternative measures of firm information environment and private information, idiosyncratic risk, and microstructure effects. The results are consistent with the cross-sectional findings of confirmation bias, where investors show stronger bias when the information environment is rich. We derive a model with confirmation bias that further explains the cross-sectional momentum pattern for the majority of firms in the market.