Neglected Firm Effect

AAA

DEFINITION of 'Neglected Firm Effect'

A theory that explains the tendency for certain lesser-known companies to outperform better-known companies. The neglected firm effect suggests that the lesser-known companies are able to generate higher returns on their stock shares, because they are less likely to be analyzed and scrutinized by market analysts. The smaller firms might also exhibit better performance, because of the higher risk/higher reward potential of small, lesser-known stocks, with a higher relative growth percentage.

INVESTOPEDIA EXPLAINS 'Neglected Firm Effect'

Smaller firms are not subject to the same scrutiny and analysis as the larger companies, such as blue-chip firms. Analysts have a vast amount of information at their disposal, on which to form opinions and make recommendations. The information regarding the smaller firms may at times be limited to those filings that are required by law. As such, these firms are "neglected" by analysts, because there simply is not much information to scrutinize or evaluate.

RELATED TERMS
  1. Firm

    A business organization, such as a corporation, limited liability ...
  2. Corporation

    A legal entity that is separate and distinct from its owners. ...
  3. Blue Chip

    A nationally recognized, well-established and financially sound ...
  4. Liquidity

    1. The degree to which an asset or security can be bought or ...
  5. Outperform

    An analyst recommendation meaning a stock is expected to do slightly ...
  6. Small Cap

    Refers to stocks with a relatively small market capitalization. ...
Related Articles
  1. What Is Market Efficiency?
    Active Trading

    What Is Market Efficiency?

  2. Seven Market Anomalies Investors Should ...
    Investing Basics

    Seven Market Anomalies Investors Should ...

  3. 7 Controversial Investing Theories
    Fundamental Analysis

    7 Controversial Investing Theories

  4. Understanding Small- And Big-Cap Stocks
    Markets

    Understanding Small- And Big-Cap Stocks

Hot Definitions
  1. Halloween Strategy

    An investment technique in which an investor sells stocks before May 1 and refrains from reinvesting in the stock market ...
  2. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  3. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  4. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  5. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  6. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
Trading Center