We employ the notion of statistical arbitrage to investigate the relationship between earnings\nsmoothing and returns from momentum trading of stocks and explore the role that the level of\ninvestor sophistication may play in the smoothing-return calculus. To do so, we exploit the\nobservation that both earnings smoothing and momentum profits are related to the\ncross-sectional variation in returns. We analyze the relevant data of 25 developed and\nemerging economies. Our results confirm the proposition that momentum profits as indicated\nby statistical arbitrage measures are inversely related to earnings smoothing but only in those\nmarkets where investors are more sophisticated and are able to take advantage of liquidity\ntraders, who are often uninformed.
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