Investor Recognition Research Articles

Company Name Fluency, Investor Recognition, and Firm Value

Company Name Fluency, Investor Recognition, and Firm Value

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.

Advertising Intensity, Investor Recognition, and Implied Cost of Capital

Advertising Intensity, Investor Recognition, and Implied Cost of Capital

Why do firms cross‐list their shares on foreign exchanges? A review of cross‐listing theories and empirical evidence

PurposeFinancial markets’ integration and technological advances in equity trading may have reduced the potential benefits from listing a firm's shares on a foreign exchange. Nevertheless, a significant number of firms continue to cross‐list every year. This paper examines the recent cross‐listing trends and reviews the literature on motives to cross‐list.Design/methodology/approachThe literature review includes a summary of theoretical studies grouped into cross‐listing theories including market segmentation, liquidity, investor recognition, information disclosure, legal bonding, proximity preference and business strategy theories, and also includes a discussion of testable implications and empirical evidence for each of the above mentioned cross‐listing theories.FindingsAn extensive cross‐listing literature offers a number of theories on the motives to cross‐list that in most cases complement each other by encompassing different aspects of the complex cross‐listing behavior. Nevertheless, continuous market developments, such as significant regulatory and technological changes in the ways capital markets operate, raise new questions on why firms cross‐list and call for further research to continue.

Company name fluency, investor recognition, and firm value

Research from psychology suggests that people evaluate fluent stimuli more favorably than similar information that is harder to process. Consistent with fluency affecting investment decisions, we find that companies with short, easy to pronounce names have higher breadth of ownership, greater share turnover, lower transaction price impacts, and higher valuation ratios. Corporate name changes increase fluency on average, and fluency-improving name changes are associated with increases in breadth of ownership, liquidity, and firm value. Name fluency also affects other investment decisions, with fluently named closed-end funds trading at smaller discounts and fluent mutual funds attracting greater fund flows.

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.

Market Conditions and Fund Flows: Evidence from Hedge Funds

This paper investigates whether market conditions affect fund investor behaviour in the hedge fund industry, especially the volatility in the up and down markets. Using a sample of 5,254 individual hedge funds from January 1994 to December 2009, we find that hedge fund investors tend to invest less during up and down-volatile markets. They also adopt different investment strategies in these two market conditions. When market is calm and relatively predictable, there is almost no difference in their behaviors between up and down markets. We also find that smart money effect exists over both 3- and 12-month periods under all market conditions except volatile markets. A further investigation suggests that the observed smart money effect is largely driven by hedge fund performance persistence, which is present and significant is quiet markets only. The findings are relevant to portfolio theories concerning investor recognition of upside and downside volatilities.

Price delay premium and liquidity risk

Hou and Moskowitz (2005) document that common stocks with more price delay in reflecting information yield higher returns and that the delay premium cannot be explained by the CAPM, Fama-French three-factor model, or Carhart's four-factor model. It cannot be explained by conventional liquidity measures either. They contend that the premium is attributable to inadequate risk sharing arising from lack of investor recognition, as Merton (1987) suggests. Using a parsimonious and powerful asset pricing model developed by Liu (2006), we re-examine the issue and find that firms with greater price delay have more difficulty attracting traders (higher incidents of non-trading) and their investors face higher liquidity risk, which accounts for their anomalous returns. Our findings suggest that the price delay premium is due to systematic liquidity risk, not inadequate risk sharing.

Idiosyncratic Volatility and the Expected Stock Returns for Exploring the Relationship with Panel Threshold Regression

This paper utilizes panel threshold regression to study the impact of idiosyncratic risk of stock returns on the Taiwan Security Market over the period from 2000 to 2011, during which there has been a noticeable increase idiosyncratic volatility. An innovative panel threshold regression model is applied to test the panel threshold effect of idiosyncratic risk on expected stock returns. The results support Merton’s (J Financ 42:579–590, 1987) investor recognition hypothesis and confirm that a threshold effect does exist. This study shows that it is possible to identify the definitive level beyond which a further increase in idiosyncratic volatility does not improve proportional expected stock returns. Some important policy implications arise from these findings. The conditional distribution of expected stock returns is allowed to vary across low volatility states. The evidence suggests that in Taiwan, idiosyncratic risk is a predictor of future market returns based upon threshold value during the lower variance state. In contrast, when the threshold value is exceeded, the relation between idiosyncratic risk and expected stock returns is not statistically significant.

Not All That Glitters Is Gold

This article investigates the relationship between a firm’s visibility in blogspaces, termed blog exposure, and the cross-sectional stock returns. We show that blog exposure is fundamentally different from the traditional media coverage, and securities with low blog exposure earn higher returns than stocks with high blog exposure. We further illustrate that such an effect is more prominent for stocks with low institutional ownership. Contrary to traditional media coverage, the return premium associated with blog exposure cannot be explained by either the illiquidity hypothesis or the investor recognition hypothesis based on the rational-agent framework. Instead, our results suggest that blog effect can be attributed to the limited attention theory and cannot be arbitraged due to investors’ self-attribution and short-sale constraints. Our research points out the importance of blogs in information dissemination, especially for the stocks with limited attention.

Is There Life after the Complete Loss of Analyst Coverage?

ABSTRACT This paper examines the value of sell-side analysts to covered firms by documenting the effects on firm performance and investor interest after a complete loss of analyst coverage for periods of at least one year. We find that analyst coverage adds value to a firm both because it reduces information asymmetries about the firm's future performance and because it maintains investor recognition for that firm's stock. After the introduction of regulations that curtailed the informational advantage of analysts in the early 2000s, the investor recognition role of analysts remains important. Firms that lose all analyst coverage continue to suffer a significant deterioration in bid-ask spreads, trading volumes, and institutional presence but do not show a significant difference in subsequent performance relative to covered peers. In addition, controlling for other factors, we find that firms that lose all analyst coverage for one year are significantly more likely to delist than their covered peers. Our results provide insight into the reasons why firms place so much importance on analyst coverage.

The Key Reasons for Cross - Listing in East African Stock Exchanges by Firms Listed in the Nairobi Securities Exchange

The purpose of this study was to investigate the key reasons behind the decision by the firm management ofNairobi Securities Exchange (NSE) listed firms to cross-list in East African Exchanges. The study employed adescriptive research design. A Likert type questionnaire was administered to the Chief Executive Officers (CEOs)or the Chief Financial Officers (CFOs) of the target firms. The study conducted factor analysis to identify the keyreasons for the cross-listing in the East African region. The key reasons identified were investor recognition,expansion of business, boosting of sales and desire to lower the cost of capital. The factor analysis did notprovide evidence that legal bonding is a motivation for the cross-listing by NSE firms. The findings from thestudy appear to indicate that there may exist contextual differences in the decisions to cross-list, consequentlygeneralizations may not suffice.

Geographic dispersion and stock returns

This paper shows that stocks of truly local firms have returns that exceed the return on stocks of geographically dispersed firms by 70 basis points per month. By extracting state name counts from annual reports filed with the Securities and Exchange Commission (SEC) on Form 10-K, we distinguish firms with business operations in only a few states from firms with operations in multiple states. Our findings are consistent with the view that lower investor recognition for local firms results in higher stock returns to compensate investors for insufficient diversification.

International Cross-Listing and Shareholders’ Wealth

This study evaluates the relationship between international cross-listings and shareholders’ wealth across different host markets and across time. For a sample of cross-listings by European companies in the US, in the UK, and within Europe, the findings show that US and UK cross-listings, on average, result in positive cumulative abnormal returns around the announcement of cross-listing. No such evidence exists for the rest of European cross-listings. In addition, the Sarbanes-Oxley Act (SOX) of 2002 affects negatively the wealth benefits of US cross-listings, while wealth creation around UK cross-listings is primarily concentrated in Alternative Investment Market listings rather than Main Market listings. There is no evidence that the introduction of the Euro affects the wealth effects of cross-listings within the Eurozone. Finally, this study provides evidence on the relative importance of alternative theories on the wealth effects of cross-listing, including market segmentation, legal bonding, liquidity, investor recognition, proximity preference, market timing and business strategy theories, after considering the effect of the introduction of the Euro and the adoption of SOX. The results show that significance of the alternative theories varies across host markets and over time.

What Makes Stock Prices Move? Fundamentals vs. Investor Recognition

The authors synthesized and extended recent research demonstrating that investor recognition is a distinct, significant determinant of stock price movements. Realized stock returns are strongly positively related to changes in investor recognition, and expected returns are strongly negatively related to the level of investor recognition. Moreover, companies time their financing and investing decisions to exploit changes in investor recognition. Investor recognition dominates stock price movements over short horizons, whereas fundamentals dominate over longer horizons.

Retail Investor Recognition and the Cross Section of Stock Returns

Academic Paper Sessions: Session 151 – The Cross-Section of Returns: Cash, Investor Recognition, and Idiosyncratic Volatility

Media Coverage and the Cross-Section of Stock Returns in Indonesia

This research evaluates if the media coverage from newspaper affect Indonesia’s securities markets in the way that the more coverage a stock get, the lower the return will be and the less coverage, or even no coverage a stock get, the higher the return will be. If it is found, then the causes behind the media effect are going to be analyzed and chosen from three different causes, which are return and reversal drift, impediment to trade hypothesis, or Merton’s investor recognition hypothesis.The research data consists of monthly return of long-short portfolio of all stocks in Indonesia’s stock market that did not cease and is not newly listed from January 2006 to December 2010, which is formed by going long (buying) no-coverage stocks and going short (selling) high-coverage stocks. The first test which is conducted is diagnostic test (normality, heteroskedasticity, auto-correlation, and multicollinearity test) to the variables to ensure that the equations in this research have BLUE estimator. Then, the ordinary least square regression is applied to the capital asset pricing model, Fama-French three factor model, and Carhart four-factor model to see whether the media effect exists.This research found that the media effect does not exist because what is found is that return of high-coverage stocks is higher than return of no-coverage stocks in Indonesia’s stock market.

Legal bonding, investor recognition, and cross-listing premia in emerging markets

Using the IFC investable measure to designate firms as either investable or non-investable prior to cross-listing, this paper shows Level 2/3 cross-listing firms that were previously non-investable enjoy the largest ‘cross-listing premia’. Since previously non-investable firms are likely to experience the largest increase in their shareholder base post-listing, the results are consistent with the notion that enhanced ‘recognition’ explains cross-listing premia. For these firms, a combination of bonding and greater recognition serves to deliver large cross-listing premia. For previously investable firms, bonding alone is sufficient to deliver cross-listing premia.

Legal Bonding, Investor Recognition, and Cross-Listing Premia in Emerging Markets

Using the IFC investable measure to designate firms as either investable or non-investable prior to cross-listing, I show that Level 2/3 cross-listing firms that were previously non-investable enjoy the largest “cross-listing premia.” Since previously non-investable firms are likely to experience the largest increase in their shareholder base post-listing, the results are consistent with the notion that enhanced “recognition” explains cross-listing premia. For these firms, a combination of bonding and greater recognition serves to deliver the largest cross-listing premia. For previously investable firms, bonding alone is sufficient to generate cross-listing premia.