Neglected Firm Effect and Stylized Equity Returns: Evidence from Pakistan

Abstract

The neglected stock effect is the phenomenon where less researched stock earns more return than that predicted by the traditional CAPM. The aim of this study is to reveal the bonding between neglected stock premium and equity returns in the stock market of Pakistan by using Fama andFrench (1992 & 1993) methodology. This study is unique with respect to Pakistan that checks the relationship among neglected stock premium and equity returns on a sample of 200 stocks listed the largest stock market of Pakistan KSE. It is corroborated that neglected firm effect is present in market and priced by the market. This manifests that those stocks which are neglected, less researched and got less analyst coverage earn higher return in comparison to popular stocks that got more analyst coverage. The results also revealed that two factor model has greater explanatory power in comparison to Traditional CAPM. The results of this study are in line with the findings of Arbel and Strebel (1980) and Bertin, Michayluk and Prather (2008) for the USA equity market. Lower research analyst coverage increases the uncertainty for investor that how the company will perform in the future, which ultimately increase the risk factor and so the demand of return from the investors. The decision makers must consider this anomaly while making decisions regarding financing, investing etc. This study will facilitate the investors in taking effective investment decision and for efficient resource allocation.

Topsis Ve Gri̇ İli̇şki̇sel Anali̇z Yöntemleri̇ İle Oluşturulan Portföyleri̇n Performanslarinin Pandemi̇ Süreci̇nde Değerlendi̇ri̇lmesi̇

“…Researchers such as Rouwenhorst (1999), Canbaş, Kandır and Erişmiş (2008), Kaya and Güngör (2018) found that stocks with lower P/D ratios outperform stocks with higher P / D ratios. Arbel et al (1983), Carvell and Strebel (1987), Jahera and Lloyd (1989), Beard and Sias (1997), Li and Fleisher (2004), Akhter et al (2015) and Sak and Dalgar (2020) found that the neglected company anomaly is valid at certain levels in their studies on the stock markets of different countries. Başçı et al (1996) found that there is a cointegration relationship between price and trading volume.…”