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

comments powered by Disqus
Hot Definitions
  1. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
  2. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  3. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  4. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  5. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  6. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
Trading Center