Investor recognition and stock returns

Reuven Lehavy () and Richard G. Sloan ()
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Reuven Lehavy: University of Michigan
Richard G. Sloan: Barclays Global Investors

Review of Accounting Studies, 2008, vol. 13, issue 2, No 10, 327-361

Abstract: 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; G14; M41; G12 (search for similar items in EconPapers)
Date: 2008
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DOI: 10.1007/s11142-007-9063-y

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