Does Investor Recognition Predict Excess Returns?
University of Illinois at Chicago
University of Zurich - Department of Banking and Finance; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne
AFA 2006 Boston Meetings Paper
We test Merton's (1987) hypothesis using individual level stockholdings of Swedish investors. Controlling for size and other factors, we find that lower levels of investor recognition lead to greater future excess returns. Positive (negative) changes in investor recognition are followed by lower (higher) excess returns. The effect of investor recognition is more pronounced for young firms. We demonstrate that investor recognition risk is conditionally priced.
Number of Pages in PDF File: 38
Keywords: Investor recognition, Limited stock market participation, Incomplete information, Asset Pricing
JEL Classification: G11, G12
Date posted: March 23, 2005