Investor recognition and stock returns
Reuven Lehavy, Richard G. Sloan
Review of Accounting Studies · 2008 · Volume 13 · Issue 2
DOI: 10.1007/s11142-007-9063-y
Abstract
It is well established that investment fundamentals, such as earnings and cash flows, can explain only a small proportion of the variation in stock returns. We find that investor recognition of a firm’s stock can explain relatively more of the variation in stock returns. Consistent with Merton’s (J Finance 42(3):483–510, 1987) theoretical analysis, we show that (i) contemporaneous stock returns are positively related to changes in investor recognition, (ii) future stock returns are negatively related to changes in investor recognition, (iii) the above relations are stronger for stocks with greater idiosyncratic risk and (iv) corporate investment and financing activities are both positively related to changes in investor recognition. Our research suggests that investors and managers who are concerned with firm valuation should consider investor recognition in addition to accounting information and related investment fundamentals.
Keywords
Investor recognition, Earnings, Stock returns, Firms’ value
Enable JavaScript for citation tools and additional paper interactions.