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. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  2. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  3. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  4. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  6. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
Trading Center