Abstract
AbstractThis study analyzes the characteristics of penny stocks and the benefits of including them in fund portfolios. First, we show that penny stocks provide abnormal returns that are not explained by traditional factor models; the liquidity factor seems to account for the excess performance. Second, we find that penny stocks can serve as a powerful investment vehicle for expanding the efficient frontier of the conventional investment set and that including them in fund portfolios improves a fund's performance. Third, we find that penny stocks held more by funds provide excess returns even for a 5‐factor model that includes a liquidity factor.
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