Neglected firm effect

{{Short description|Stock market anomaly}}

{{Multiple issues|{{refimprove|date=January 2010}}

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The neglected firm effect is the market anomaly phenomenon of lesser-known firms producing abnormally high returns on their stocks. 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.

At the same time, the impact on returns, {{cite journal|jstor=10.1086/210178|title=The Categorical Imperative: Securities Analysts and the Illegitimacy Discount|first=Ezra W.|last=Zuckerman|s2cid=143734005|date=18 May 1999|journal=American Journal of Sociology|volume=104|issue=5|pages=1398–1438|doi=10.1086/210178}} and regarding earnings management is not always clear.Laura Lindsey, Simona Mola (2013).[https://www.sec.gov/files/rsfi-wp2013-04.pdf Analyst Competition and Monitoring: Earnings Management in Neglected Firms], DERA Working Paper 2013-04

According to Investopedia: Adam Hayes (2022). [https://www.investopedia.com/terms/n/neglectedfirm.asp Neglected Firm Effect] "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."