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Investor recognition and stock returns

Author

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  • Reuven Lehavy

    (University of Michigan)

  • Richard G. Sloan

    (Barclays Global Investors)

Abstract

It is well established that investment fundamentals, such as earnings and cash flows, can explain only a small proportion of the variation in stock returns. We find that investor recognition of a firm’s stock can explain relatively more of the variation in stock returns. Consistent with Merton’s (J Finance 42(3):483–510, 1987) theoretical analysis, we show that (i) contemporaneous stock returns are positively related to changes in investor recognition, (ii) future stock returns are negatively related to changes in investor recognition, (iii) the above relations are stronger for stocks with greater idiosyncratic risk and (iv) corporate investment and financing activities are both positively related to changes in investor recognition. Our research suggests that investors and managers who are concerned with firm valuation should consider investor recognition in addition to accounting information and related investment fundamentals.

Suggested Citation

  • Reuven Lehavy & Richard G. Sloan, 2008. "Investor recognition and stock returns," Review of Accounting Studies, Springer, vol. 13(2), pages 327-361, September.
    • Handle: RePEc:spr:reaccs:v:13:y:2008:i:2:d:10.1007_s11142-007-9063-y
    DOI: 10.1007/s11142-007-9063-y
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    References listed on IDEAS

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    Cited by:

    1. Ying Cao & James N. Myers & Linda A. Myers & Thomas C. Omer, 2015. "Company reputation and the cost of equity capital," Review of Accounting Studies, Springer, vol. 20(1), pages 42-81, March.

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