Liquidity Issues Surrounding Neglected Firms

Investment Management and Financial Innovations, Vol. 5, No. 1, pp. 57-65, 2008

Posted: 4 Apr 2009

See all articles by William J. Bertin

William J. Bertin

Bond University - Faculty of Business, Technology and Sustainable Development

David Michayluk

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR)

Laurie Prather

Bond University - Faculty of Business, Technology and Sustainable Development

Date Written: 2008

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.

Keywords: neglected firm, market microstructure, earnings announcements, analyst following

JEL Classification: G12

Suggested Citation

Bertin, William J. and Michayluk, David and Prather, Laurie, Liquidity Issues Surrounding Neglected Firms (2008). Investment Management and Financial Innovations, Vol. 5, No. 1, pp. 57-65, 2008, Available at SSRN: https://ssrn.com/abstract=1372889

William J. Bertin

Bond University - Faculty of Business, Technology and Sustainable Development ( email )

Gold Coast, QLD 4229
Australia

David Michayluk

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

Finance Discipline Group
UTS Business
Sydney, NSW 2007
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Laurie Prather (Contact Author)

Bond University - Faculty of Business, Technology and Sustainable Development ( email )

Gold Coast, QLD 4229
Australia

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