Retail Investor Recognition and the Cross Section of Stock Returns

53 Pages Posted: 16 Feb 2012 Last revised: 8 May 2013

See all articles by Eric C. Chang

Eric C. Chang

University of Hong Kong - School of Business

Chaoli Guo

The University of Hong Kong - School of Business

Jinjuan Ren

University of Macau

Date Written: March 10, 2011

Abstract

We test and offer support to Merton’s (1987) theory that difference in a stock’s investor recognition affects its cost of capital. In the U.S. market, using the breadth of ownership among retail investors as a proxy for investor recognition, we show that a long-short portfolio based on the annual change of shareholder base earns a compounded annual abnormal return of 6.42% after controlling for the Fama-French three factors. These results are more pronounced among young, low visibility and high idiosyncratic volatility stocks. Moreover, we present evidence that the investor recognition effect can explain approximately 20% of the puzzling net equity issuance effect documented by Pontiff and Woodgate (2008).

Keywords: Retail investor recognition, Ownership breadth, Net equity issuance

JEL Classification: D83, G11, G12

Suggested Citation

Chang, Eric Chieh C. and Guo, Chaoli and Ren, Jinjuan, Retail Investor Recognition and the Cross Section of Stock Returns (March 10, 2011). Available at SSRN: https://ssrn.com/abstract=1998697 or http://dx.doi.org/10.2139/ssrn.1998697

Eric Chieh C. Chang (Contact Author)

University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

Chaoli Guo

The University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

Jinjuan Ren

University of Macau ( email )

Room 4079, E22, Faculty of Business Administration
University of Macau
Taipa, Taipa Nil
Macau
(853) 8822-4185 (Phone)

HOME PAGE: http://www.umac.mo/fba/staff/susanren.html

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