Neglected Firm Effect

The phenomenon of less-known firms producing abnormally high returns on their stocks.




Taobiz explains Neglected Firm Effect
Neglected firms are usually the smaller firms that analysts tend to ignore. Information available on these smaller companies tends to be limited to those items that are required by law, such as the 10-K. Blue-chip firms, 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.

The abnormally high return exhibited by neglected firms may also be due to the lower liquidity or higher risks associated with the stock.