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Liquidity issues surrounding neglected firms

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Abstract

The neglected firm effect is the phenomenon where stocks of less widely-known firms have larger returns than that predicted by asset pricing models. Researchers have found mitigating variables, such as the price of the stock, that have partially explained the performance of neglected firms. Neglect and price may be proxies for the liquidity of each firm’s stock, and the higher observed returns may actually be a premium for the lack of liquidity. This paper compares two definitions of neglect and their relationship with liquidity. When neglect is measured by the number of analysts following a stock, more analysts are associated with higher liquidity for the stock. An even stronger relationship is observed when the proxy for neglect is widely disseminated earnings announcements. These results are confirmed in regression analyses that control for the stock price.

Suggested Citation

  • William J. Bertin & David Michayluk & Laurie Prather, 2008. "Liquidity issues surrounding neglected firms," Published Paper Series 2008-2, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    • Handle: RePEc:uts:ppaper:2008-2
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    Cited by:

    1. Leonardo Fernandez, 2012. "Price Discovery, Investor Distraction and Analyst Recommendations Under Continuous Disclosure Requirements in Australia," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2012.
    2. Leonardo Fernandez, 2012. "Price Discovery, Investor Distraction and Analyst Recommendations Under Continuous Disclosure Requirements in Australia," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 3, July-Dece.

    More about this item

    Keywords

    neglected firm; market microstructure; earnings announcements; analyst following;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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