Customer Momentum and Its Decline After Discovery

Summary

This paper studies customer momentum, a return pattern in which a firm’s performance is positively related to the earlier performance of its customers. It reports that the effect is distinct from conventional price momentum and earnings momentum, while being partly connected to lead-lag effects between small and large stocks.

The reported tests find statistically and economically meaningful long-short portfolio returns in the original sample. In the period after the effect became known, its magnitude is smaller and it is no longer statistically significant. That pattern is consistent with investor exploitation reducing the opportunity, though the summary does not establish that exploitation caused the decline. The evidence is based on historical portfolio and factor-model analysis; the supplied description does not provide sample dates, implementation costs, or details needed to assess whether the strategy remains usable after trading frictions.

Key ideas

• Customer momentum links a firm’s returns to the past returns of its customers.
• The paper reports that customer momentum is not explained by price momentum or earnings momentum.
• Lead-lag effects between small and large stocks account for part of the pattern.
• The reported effect weakens and loses statistical significance after its discovery.
• The post-discovery decline is consistent with exploitation, but does not prove that explanation.

Tags

# Customer Momentum


# Customer Momentum









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.

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