Customer Momentum

TL;DR

This paper investigates customer momentum, confirming its significance, analyzing its drivers, and observing its decline post-discovery, suggesting investor exploitation reduced its impact over time.

Contribution

It provides empirical evidence of customer momentum's significance, explores its drivers, and documents its decline after initial discovery.

Findings

Customer momentum is statistically and economically significant.

It is not explained by price or earnings momentum.

Its magnitude decreased and lost significance after discovery.

Abstract

This paper examines customer momentum, defined as a positive relationship between a firm's returns and past returns of its customers. I confirm previous evidence (Cohen and Frazzini 2008) that customer momentum is both statistically and economically significant. Long-short equally-weighted (value-weighted) decile portfolio generates a monthly return of 122 (106) basis points and a t-statistic above 4 (2.8) with respect to Fama-French factor models. The paper reports that customer momentum neither explains nor is explained by price momentum and earnings momentum. Customer momentum is partially driven by the lead-lag relationship between small and large stocks. I find that in the post-discovery sample, customer momentum has a smaller magnitude and loses statistical significance. The results are consistent with the hypothesis that after its discovery, customer momentum decreased due to exploitation by investors.