Portfolio strategies that buy stocks with high returns over the previous 3-12 months and sell stocks with low returns over this same time period perform well over the following 12 months. A recent article by Conrad and Kaul (1998) presents striking evidence suggesting that the momentum profits are attributable to cross-sectional differences in expected returns rather than to any time-series dependence in returns. This article shows that Conrad and Kaul reach this conclusion because they do not take into account the small sample biases in their tests and bootstrap experiments. Our unbiased empirical tests indicate that cross-sectional differences in expected returns explain very little, if any, of the momentum profits.

Portfolio strategies that buy stocks with high returns over the previous 3–12 months and sell stocks with low returns over this same time period perform well over the following 12 months. A recent article by Conrad and Kaul (1998) presents striking evidence suggesting that the momentum profits are attributable to cross-sectional differences in expected returns rather than to any time-series dependence in returns. This article shows that Conrad and Kaul reach this conclusion because they do not take into account the small sample biases in their tests and bootstrap experiments. Our unbiased empirical tests indicate that cross-sectional differences in expected returns explain very little, if any, of the momentum profits.

We examine the book-building method for marketing IPOs. In our model, the underwriter selects a group of investors along with a pricing and allocation mechanism to maximize (at minimum cost) the information generated during the process of going public. We also address the moral hazard problem faced by investors when evaluation is costly. When there is little need for accurate pricing, the expected gain from underpricing exactly offsets the investors’ costs of acquiring information. When pricing accuracy is important, however, the number of investors participating in the offering is larger, underpricing is greater, and investors can earn economic rents.