This dynamic pattern is, of course, completely consistent with the theory of gradual information diffusion that we have been emphasizing. In the context of this theory one would interpret Figure 1A as follows: high-coverage SUB3 firms underreact by roughly 9% to the information contained in lagged six-month returns, and it takes them a little less than a year to fully catch up. In contrast, low-coverage SUB1 firms underreact by more, on the order of 20%. Their adjustment to long-run equilibrium not only involves more movement in the first year, but also requires a longer period of time to fully play itself out.
In Panel B, we explore the dynamics of our LAST strategy. Focusing only on the past-loser stocks in PI, we plot the cumulative returns for P 1/SUB 1, P1/SUB3, and the LAST portfolio that is short the former and long the latter. The time profile that emerges is almost identical to that in Panel A, and is consistent with our earlier conclusion that virtually all of the SUB1 vs. SUB3 action is coming from the losers in PI. In particular, the high-coverage P1/SUB3 stocks continue to perform poorly for about ten months, and then flatten out. The low-coverage P1/SUB1 stocks not only perform worse over the first ten months, but continue to do poorly until about two years out. Consequently, the LAST strategy keeps on earning incremental profits up to the two-year mark, with the cumulated profit amounting to 9.32%.