Neglected firm effect
Encyclopedia
The Neglected firm effect is the phenomenon of lesser-known firms producing abnormally high returns
on their stock
s. The companies that are followed by fewer analysts
will earn higher returns on average than companies that are followed by many analysts. The abnormally high return exhibited by neglected firms may be due to the lower liquidity or higher risks associated with the stock.
According to Investopedia: "Neglected firms are usually the small firms that analysts tend to ignore. Information available on these companies tends to be limited to those items that are required by law, on the other hand, have a higher profile, which provides large amounts of high quality information (in addition to legally required forms) to institutional investors such as pension
or mutual fund
companies."
Return on investment
Return on investment is one way of considering profits in relation to capital invested. Return on assets , return on net assets , return on capital and return on invested capital are similar measures with variations on how “investment” is defined.Marketing not only influences net profits but also...
on their stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
s. The companies that are followed by fewer analysts
Financial analyst
A financial analyst, securities analyst, research analyst, equity analyst, or investment analyst is a person who performs financial analysis for external or internal clients as a core part of the job.-Job:...
will earn higher returns on average than companies that are followed by many analysts. The abnormally high return exhibited by neglected firms may be due to the lower liquidity or higher risks associated with the stock.
According to Investopedia: "Neglected firms are usually the small firms that analysts tend to ignore. Information available on these companies tends to be limited to those items that are required by law, on the other hand, have a higher profile, which provides large amounts of high quality information (in addition to legally required forms) to institutional investors such as pension
Pension
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
or mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
companies."