Investor Recognition Hypothesis Research Articles

How Can Google Trends Be Used as a Technical Indicator for Investor Interest?

Since investor interest is not a directly measurable concept, search engine and social media data can be used to measure active investor interest. Google search volume data has the potential to help customers, investors, and policymakers make better decisions. When looking for information to make investment decisions, investors consider Google trends as they provide news about changes in prices. Studies examining investor interest in the literature have often been carried out with the applications of linear models. This suggests that possible structural changes are not taken into account in the time series. When we look at the literature, it has been shown that the prediction performance of nonlinear models is better than linear models. In addition, it is seen that the studies conducted to investigate the relationship between the return of the stock markets and the trading volume and the investor interest are frequently included in the international literature. In contrast, the studies are limited in the national literature. In this direction of the study, the relationship between the trade volume and the investor's discovery of information on the stock market by Google is examined through linear and nonlinear econometric techniques in the investor reputation hypothesis. According to the investor reputation hypothesis, investors only invest in stocks they are aware of without adequate research and knowledge. In this context, the study results were realized in a way that supports the investor recognition hypothesis within the scope of 2020. In the context of 2021, it is seen that it does not support the investor reputation hypothesis. In future studies to be carried out in this area, it seems possible to determine the degree of effect of nonlinear regression estimations and the relationship between variables.

Ownership breadth: Investor recognition or short-sale constraints?

Miller (1977)’s short-sale constraints hypothesis and Merton (1987)’s investor recognition hypothesis infer opposite relationships between ownership breadth and future stock returns. We find the mixed empirical evidence in prior literature comes from opposite effects of positive and negative breadth changes on returns. The breadth-future return relationship is positive when breadth decreases, whereas the relationship becomes negative when breadth increases. Our results suggest that the investor recognition hypothesis dominates when breadth increases, whereas the short-sale constraints hypothesis dominates when breadth decreases. This reconciles not only the conflicting evidence but also the predictions of Miller (1977) and Merton (1987).

Web-based impression management? Salient features for CSR disclosure prominence

PurposeThe purpose of this paper is to identify the web-based features of corporate social responsibility (CSR) disclosure that play a role in making CSR information prominent to investors and give the information better recognition for investment decisions.Design/methodology/approachThe authors posit a positive association between the company’s capital market performance and the web-based features used for CSR disclosure by the company. The authors argue that the more effective the feature is in enhancing the prominence of CSR information, the higher is the share turnover and market value of shares of a company, and the lower is its share prices’ bid-ask spread. Five specific web-based features, namely, the location, accessibility, medium, variety and extent of disclosure are identified as features used for web-based CSR disclosure. The research framework is drawn from Brennan and Merkl–Davies’ (2013) impression management strategies and Merton’s (1987) “investor recognition hypothesis”.FindingsThe findings show that visual and structural emphases of CSR information via specific web-based features enhance information prominence and could favourably influence investors’ impression towards the company. Investors are likely to make investment decisions in favour of the company, resulting in a higher share turnover along with increased market value of the shares of the company and lower bid-ask spread of its share prices.Research limitations/implicationsThe paper highlights the significance of utilisation of web-based features in enhancing CSR information prominence for impression management purposes.Practical implicationsThe findings have the potential to benefit preparers, users and policymakers by enhancing their knowledge and understanding of the utilisation of web-based CSR disclosure features. Specifically, preparers will be more aware of web-based feature(s) that could be useful in projecting CSR-related information to their stakeholders.Social implicationsThe study will help enhance the dissemination of web-based CSR information.Originality/valueThe study adds to the literature on web-based CSR disclosure, by developing a structured approach to examine the effectiveness of web-based features for investors’ impression management.

Social media effect, investor recognition and the cross-section of stock returns

Investor recognition affects cross-sectional stock returns. In informationally incomplete markets, investors have limited recognition of all securities, and their holding of stocks with low recognition requires compensation for being imperfectly diversified. Using the number of posts on the Chinese social media platform Guba to measure investor recognition of stocks, this paper provides a direct test of Merton's investor recognition hypothesis. We find a significant social media premium in the Chinese stock market. We further find that including a social media factor based on this premium significantly improves the explanatory power of Fama-French factor models of cross-sectional stock returns, and these results are robust when we control for the mass media effect and liquidity effect. Finally, we find that investment strategies based on the social media factor earn sizable risk-adjusted returns, which signifies the importance of the social media premium in portfolio management.

Social Media Effect, Investor Recognition and the Cross-Section of Stock Returns

Investor recognition affects cross-sectional stock returns. In informationally incomplete markets, investors have limited recognition of all securities, and their holding of stocks with low recognition requires compensation for being imperfectly diversified. Using the number of posts on the Chinese social media platform Guba to measure investor recognition of stocks, this paper provides a direct test of Merton's investor recognition hypothesis. We find a significant social media premium in the Chinese stock market. We further find that including a social media factor based on this premium significantly improves the explanatory power of Fama-French factor models of cross-sectional stock returns, and these results are robust when we control for the mass media effect and liquidity effect. Finally, we find that investment strategies based on the social media factor earn sizable risk-adjusted returns, which signifies the importance of the social media premium in portfolio management.

The high-volume return premium and changes in investor recognition

The phenomenon of high-volume return premium is generally attributed to the visibility hypothesis proposed by Gervais et al. (2001) based on the theoretical framework of Miller (1977) and Merton's (1987) investor recognition hypothesis. However, no existing empirical study has directly tested the visibility hypothesis due to the lack of high-frequency shareholding data. In this paper, we utilize the unique daily shareholding data for stocks listed on the Australian Stock Exchange to directly test this hypothesis by examining the relationship between the high-volume return premium and changes in investor recognition. We find that high-volume shocks do attract more investor attention and increase the investor base on the date of, and following, the shocks. This provides direct empirical evidence in support of the visibility explanation for the high-volume return premium. We also find that institutional and individual investors attend to different kinds of stocks; stocks attracting more institutional (individual) investors outperform (underperform) subsequent the volume shocks and exhibit a higher (lower) high-volume return premium. Our findings shed new light on the visibility hypothesis by showing that recognition/attention from institutional or individual investor is also crucial in determining the extent of the high-volume return premium and may help to reconcile the existing mixed empirical evidence across international markets.

Media Coverage and the Cross‐Section of Stock Returns: The Chinese Evidence

AbstractUsing hand‐collected news headlines for a large sample of listed firms in China over a period of 2000–2015, we investigate the cross‐sectional relation between media coverage and stock returns. Our results document that no‐media coverage stocks earn 55 basis points a month higher than stocks that are featured in the media. This result is robust after controlling for common risk factors and is not driven by short‐run return reversals. Further analysis provides evidence to support the investor recognition hypothesis, suggesting that mass media may play an incremental role in providing a supplement to traditional channels of information dissemination. Therefore, results in this paper are of interests to both investors and regulators on drivers of stock returns.

The Effect of Implicit Market Barriers on Stock Trading and Liquidity

We compare the performance of Islamic and conventional stock returns in Saudi Arabia in order to determine whether the Saudi market exhibits characteristics that are consistent with segmented markets and investor recognition effects. We sample the daily stock returns of all Saudi firms from September 2002 to 2015 and calculate important measures, including idiosyncratic volatility, market integration, systematic turnover, and stock turnover and liquidity. Integration tests report that Islamic stocks are more sensitive to changes in global and local macroeconomic variables than conventional stocks, supporting the hypothesis that the Islamic and conventional stock markets are segmented in Saudi Arabia. In addition, our results show that Islamic stocks have a broader investor base, lower idiosyncratic risk, higher systematic turnover, and are more liquid than conventional stocks, which support the investor recognition hypothesis. Our results provide new evidence on asset pricing in emerging markets, the evolving Islamic financial markets, and the potential impact of other implicit market barriers on global financial markets.

Does Cross-Listing Really Enhance Market Efficiency for Stocks Listed in the Home Market? The Perspective of Noise Trading in the Chinese Stock Market

ABSTRACTThe investor recognition hypothesis and the bonding hypothesis, which help us understand the market quality of stocks that are cross-listed on different stock markets, imply improved market efficiency after cross-listing because of increased investor participation. However, the noise trading of inexperienced investors in the Chinese stock market negatively affects market efficiency. By employing propensity score matching and multivariate regression analysis, we show that the increased individual investor participation actually lowers market efficiency in their home market after cross-listing. This effect is more evident for stocks that were either listed first on the Chinese stock market or listed on the Chinese stock market and the Hong Kong stock exchange (SEHK) on the same date than for stocks that were listed first on the SEHK.

Investor Attention and Global Stock Returns

ABSTRACTThe author constructs a direct measure of investor attention toward global benchmark indices using Google search volume and empirically examines its impact on stock returns. The author documents a significant decrease in index returns following an increase in investor attention. This result is consistent with the investor recognition hypothesis (Merton [1987]) and the finding of no-media premium in the United States (Fang and Peress [2009]). Additional tests suggest that the attention effect may be attributable to local and U.S. investors. Finally, such negative effect of attention is found to be strengthened (weaken) in the market with positive (negative) sentiments.

The impact of media coverage on investor trading behavior and stock returns

The investor recognition hypothesis suggests that, when a firm is recognized by investors through the mass media, this helps to increase the firm's investor base and causes reactions in stock prices. Using a comprehensive database of media coverage on Taiwanese listed firms, this paper applies textual analysis to the news content and classifies it into ten news categories. Among them, seven news categories can be identified as conveying a positive or negative tone and the remaining three are news announcements. The empirical results show that investor trading behavior is affected not only by the quantity, but also the quality, of news announcements. Different types of investors have different responses to the tone of media coverage. The trading behavior of foreign institutional investors is consistent with the tone of media coverage. The results are robust after accounting for the effect of several firm risks, characteristics and investors' unobservable private information. In addition, the majority of the positive or negative media coverage classified in this paper is significantly related to the same sign of abnormal returns.

The Real Side of the High-Volume Return Premium

We investigate whether shocks to trading volume of a stock contain information about future corporate investment activity; an unexplored prediction of the link between the high-volume return premium and the Merton (1987) investor recognition hypothesis. Using a q-theory model of corporate investment as a framework, we document a positive relation between abnormal trading volume around earnings announcements and future investment expenditures. The relation persists across quarterly and annual horizons and, consistent with theory, is concentrated among firms with high financing constraints. We also find that shocks to trading volume serve as an important channel for facilitating the previously documented contemporaneous relation between investor recognition and corporate investments. Taken together, consistent with the idea that extreme trading activity of a stock is associated with an increase in firm visibility, our study suggests that shocks to trading volume play an important role in enhancing corporate investment activity.

Media Coverage and the Cross-Section of Stock Returns: Chinese Evidence

Using hand‐collected news headlines for a large sample of listed firms in China over a period of 2000–2015, we investigate the cross‐sectional relation between media coverage and stock returns. Our results document that no‐media coverage stocks earn 55 basis points a month higher than stocks that are featured in the media. This result is robust after controlling for common risk factors and is not driven by short‐run return reversals. Further analysis provides evidence to support the investor recognition hypothesis, suggesting that mass media may play an incremental role in providing a supplement to traditional channels of information dissemination. Therefore, results in this paper are of interests to both investors and regulators on drivers of stock returns.

Do Cross Listed Firms Thrive Better Under Crisis? Non Parametric Evidence from Zimbabwe.

This study sought to empirically examine whether cross listed firms perform better than non- cross listed firms in periods of economic crisis. The study reviewed several theories of the motivations for cross listing including the liquidity hypothesis, the market segmentation hypothesis, investor recognition hypothesis and the growth opportunities hypothesis. The study utilised secondary data from companies’ published financial statements. A sample of sixteen (16) companies were studied, eight were cross listed, and eight were purely domestically listed. The study period was 2010-2014, and the data for analysis was in form of financial ratios. Data analysis was done using SPSS 16.0. Non-parametric methods; the Mann Whitney U test was used verify if there are differences in the performance of cross listed and non-cross listed firms. The study found that cross listed firms are more efficient, better governed and have higher market value compared to non-cross listed firm. There was however no statistical evidence of differences in the total assets and ability to pay interest obligations between the cross listed and non-cross listed firms.

Empirical Study on the Formation Mechanism of Media Effect in Chinese Stock Market

This paper investigates the formation mechanism of media effect in Chinese stock market. We prove the existence of media effect in Chinese market and examine the three hypotheses (Impediment to Trade Hypothesis, Return Continuation and Reversal Hypothesis and Investor Recognition Hypothesis) of its formation mechanism respectively. We compare the media effect in Main Board, Small and Medium Enterprise Board, and Growth Enterprise Market respectively. We find media effect is most significant in Growth Enterprise Market and the result is consistent with Impediment to Trade Hypothesis. We divide our samples into 4 quartiles and the results are consistent with Return Continuation and Reversal Hypothesis. We can not find significant relationship between analyst reports and stock return, therefore we can not prove the validity of Investor Recognition Hypothesis in Chinese market. This paper sheds light on Chinese Multi-level Capital market and extends empirical results of media effect in Chinese market.

Twitter-Based Dissemination of Corporate Disclosure and the Intervening Effects of Firms' Visibility: Evidence from Australian-Listed Companies

ABSTRACT This paper investigates the effect of dissemination of corporate disclosure via Twitter. In particular, the study is focused on listed companies in Australia that employed Twitter as a secondary dissemination channel for corporate announcements in 2008–2013. Based on a sample of 3,516 announcements at the Australian Stock Exchange (ASX) related to 109 listed companies, the research employs the Investor Recognition Hypothesis to investigate the effect of Twitter activity on the information asymmetry proxied by abnormal spread (SpreadAbn). The findings show that there is a negative association between SpreadAbn and tweets posted by a firm during the announcement period. Further analysis shows that this association is stronger for firms less visible through business press or financial analyst coverage. The study concludes that while corporate announcements are publicly available through the ASX platform, dissemination of corporate announcements through Twitter allows companies to attract investors' attention and decrease information asymmetry.

The High Volume Return Premium and Changes in Investor Recognition

Utilising unique shareholding data for Australian equities we examine whether the high volume return premium (‘HVRP’) is associated with changes in investor recognition as has been posited in various empirical studies. We confirm the existence of the premium in Australia as stocks which experience unusually high volume over a day significantly outperform stocks which experience unusually low volume. The premium is strongest in the first two weeks following the extreme volume event and among stocks with recent poor return performance. However, we show the HVRP is more likely attributable to divergent opinions and to superior stock selection by institutional investors than to the changes in risk-sharing that underline the pricing-effects of Merton’s (1987) investor recognition hypothesis. Specifically, the premium exists irrespective of increases or decreases in the breadth of ownership of a stock around the extreme volume event. Evidence that high volume stocks that attract more institutional (individual) investors but fewer individuals (institutions), show the highest (lowest) returns following the extreme volume event, suggests the premium may relate, in part, to superior stock selection or a private information advantage among institutional investors.

The Long-Run Role of the Media: Evidence from Initial Public Offerings

The unique characteristics of the U.S. initial public offer (IPO) process, particularly the strict quiet period regulations, allow us to explore the effects of media coverage when the coverage does not contain genuine news (i.e., hard information that was previously unknown). We show that a simple, objective measure of pre-IPO media coverage is positively related to the stock’s long term value, liquidity, analyst coverage, and institutional investor ownership. Our results are robust to additional controls for size, to using abnormal or excess media, and to an instrumental variable approach. We also find that pre-IPO media coverage is negatively related to future expected returns, measured by the implied cost of capital. In all, we find a long term role for media coverage, consistent with Merton’s (1987) attention or investor recognition hypothesis.

The High Volume Return Premium and Changes in Investor Recognition

Utilising unique shareholding data for Australian equities we examine whether the high volume return premium (‘HVRP’) is associated with changes in investor recognition as has been posited in various empirical studies. We confirm the existence of the premium in Australia as stocks which experience unusually high volume over a day significantly outperform stocks which experience unusually low volume. The premium is strongest in the first two weeks following the extreme volume event and among stocks with recent poor return performance. However, we show the HVRP is more likely attributable to divergent opinions and to superior stock selection by institutional investors than to the changes in risk-sharing that underline the pricing-effects of Merton’s (1987) investor recognition hypothesis. Specifically, the premium exists irrespective of increases or decreases in the breadth of ownership of a stock around the extreme volume event. Evidence that high volume stocks that attract more institutional (individual) investors but fewer individuals (institutions), show the highest (lowest) returns following the extreme volume event, suggests the premium may relate, in part, to superior stock selection or a private information advantage among institutional investors.

Sponsored analyst coverage, information asymmetry and stock turnover

This study draws on Merton’s investor recognition hypothesis to investigate whether (1) the sponsored analyst coverage scheme introduced by the Bursa Malaysia in April 2005 is associated with stock turnover, and (2) the relationship is stronger for firms with high information asymmetry. The results show that stock turnover is positively associated with the frequency of coverage and the association is stronger for firms with higher information asymmetry. In addition, it is found that during the initial stage of the scheme where the stock market was experiencing a downturn, analyst coverage has a significant constraining effect on the reduction in stock turnover.