Firm Size and Momentum Returns: The Roles of Analyst Coverage and Herding Behavior

Momentum strategies have historically generated excess returns, but their effectiveness noticeably deteriorated in the post-pandemic period, especially in 2022–23. In this paper, we explore how changes in investor attention during and after the COVID-19 pandemic may have altered the performance of momentum strategies. Specifically, we investigate the relationship between firm size and momentum returns, focusing on two behavioral channels through which attention shifts might operate: analyst coverage and herding behavior. We apply a 6-month ranking and holding momentum strategy across ten groups of firms (based on market capitalization). The portfolios are further segmented by three analyst coverage classes (measured by the number of covering analysts) and five herding quintiles (measured by trading volume and turnover ratio). We find that momentum strategies are more effective in smaller stocks and insignificantly negative in larger stocks. Lower analyst coverage in smaller firms is associated with higher momentum returns. Stocks with a low level of herding tend to generate higher momentum returns compared to those with a medium or higher level of herding.