Department of Business Administration2024-11-0920081062-976910.1016/j.qref.2006.06.0022-s2.0-47549092771http://dx.doi.org/10.1016/j.qref.2006.06.002https://hdl.handle.net/20.500.14288/13077Various rational and behavioral models have been proposed to explain contrarian portfolio returns. In this article, I test the gradual information diffusion model of Hong and Stein [Hong, H., & Stein J. C. (1999). A unified theory of underreaction, momentum trading, and overreaction in asset markets. Journal of Finance, 54, 2143-2184]. Specifically, I study contrarian strategies based on past long-term returns and fundamental value-to-price ratios. Using ex post returns as a proxy for expected returns and size-controlled analyst coverage as a proxy for the rate of information diffusion, I show that contrarian portfolio returns decline monotonically with increasing rates of information diffusion. These results are consistent with the predictions of the Hong and Stein model. In addition, I show that analyst coverage is more important among glamour than value stocks, supporting the view that investors are more prone to decision biases when it comes to pricing hard-to-value glamour stocks for which information is relatively more ambiguous.EconomicsJournal Article1878-4259437609600007Q19217