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Do external sources generate greater investor awareness that can affect a firm's value and cost of capital?

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  • Roy Clemons
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    Abstract

    Purpose – The purpose of this paper is to examine whether focused attention on a firm by an external organization, group, or influential analyst generates greater investor awareness that can affect a firm's value and cost of capital. This study is motivated by contemporary research that provides support for the hypothesis that investors have limited attention. Prior studies have focused on how investors' limited attention has influenced their analysis of firm-specific financial data. The studies have shown that investors may have limited attention and hence pay more attention to the more salient financial statement items. This paper extends this stream of research by empirically testing to determine if external sources attract investors' limited attention to a firm. Design/methodology/approach – The paper examines the published monthly Center for Financial Research and Analysis (CFRA) research reports from 1998 through 2004 that identify firms experiencing operational problems and/or using unusual or aggressive accounting practices. To provide evidence that information appearing in CFRA research reports has not already been impounded into a firm's stock price prior to the publication of the CFRA research report, the paper tests for abnormal returns around the publication of the CFRA research reports. Second, to provide evidence that the firms' cost of capital decreases after the publication date of the CFRA research reports, the paper tests for a decrease in the bid-ask spreads after firms appear on the CFRA research reports. Findings – Support was found for the hypothesis that firms experience a significant decline in their market value in the days surrounding their appearance on the CFRA research reports. For a sample of 892 firms, the cumulative abnormal returns (CARs) for a two-day window around a firm's appearance on a CFRA research report is -1.89 percent, and the CARs for a seven-day window around a firm's appearance on a CFRA research report is -3.50 percent. Originality/value – The paper's findings suggest that the information from the fundamental analysis conducted by the Center for Financial Research and Analysis has not already been impounded into a firm's stock price before its appearance on a CFRA research report. Although the paper found a decrease in the mean difference in the bid-ask spread change, it cannot provide statistically significant support for the hypothesis that a firm's cost of capital decreases after appearing on a CFRA research report.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Review of Accounting and Finance.

    Volume (Year): 9 (2010)
    Issue (Month): 4 (November)
    Pages: 382 - 394

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    Handle: RePEc:eme:rafpps:v:9:y:2010:i:4:p:382-394

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    Related research

    Keywords: Bid offer spreads; Cost of capital; Disclosure; Investors;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
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    4. David Hirshleifer & KEWEI HOU & Siew Hong Teoh & YINGLEI ZHANG, 2004. "Do Investors Overvalue Firms With Bloated Balance Sheets?," Finance 0412001, EconWPA.
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    9. Gur Huberman, 2001. "Contagious Speculation and a Cure for Cancer: A Nonevent that Made Stock Prices Soar," Journal of Finance, American Finance Association, vol. 56(1), pages 387-396, 02.
    10. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
    11. Gifford Sharon, 2005. "Limited Attention as the Bound on Rationality," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 5(1), pages 1-42, December.
    12. Brad M. Barber & Terrance Odean, 2008. "All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors," Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 785-818, April.
    13. Admati, Anat R & Pfleiderer, Paul, 1988. "Selling and Trading on Information in Financial Markets," American Economic Review, American Economic Association, vol. 78(2), pages 96-103, May.
    14. Busse, Jeffrey A. & Clifton Green, T., 2002. "Market efficiency in real time," Journal of Financial Economics, Elsevier, vol. 65(3), pages 415-437, September.
    15. Ou, Jane A. & Penman, Stephen H., 1989. "Financial statement analysis and the prediction of stock returns," Journal of Accounting and Economics, Elsevier, vol. 11(4), pages 295-329, November.
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