Market Frictions, Price Delay, and the Cross-Section of Expected Returns

Abstract

We parsimoniously characterize the severity of market frictions affecting a stock using the delay with which its share price responds to information. The most severely delayed firms command a large return premium that captures the size effect and half the value premium. Moreover, idiosyncratic risk is priced only among the most delayed firms. These results are not explained by other sources of return premia, microstructure, or pure liquidity effects, but appear most consistent with investor recognition and firm neglect. The very small segment of neglected firms (less than 0.02% of the market) captures a sizeable amount of cross-sectional variation in average returns.