Neglected Firm Effect


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.

BREAKING DOWN '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.

  1. Liquidity

    The degree to which an asset or security can be quickly bought ...
  2. Firm

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

    A legal entity that is separate and distinct from its owners. ...
  4. Outperform

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

    Refers to stocks with a relatively small market capitalization. ...
  6. Blue Chip

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