Merton's Investor Recognition Research Articles

The valuation effects of unit versus share‐only IPOs

AbstractUnits consist of shares and warrants. Some firms issue units in initial public offerings (IPOs) after which warrant holders can exercise warrants and purchase shares from the issuer. Why do firms choose to issue units instead of only shares? I answer this question based on Merton's investor recognition model. Firms lacking pre‐IPO publicity can benefit from an increase in investor recognition. I find that unit firms have less pre‐IPO publicity than share‐only firms. Separate trading between warrants and shares and eventual exercise of the warrants will increase the number of shareholders and therefore firm value.

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.