Certain securities—in particular, those of small capitalization firms—are generally unsuited to the investment requirements of financial institutions, hence attract minimal coverage by analysts. As a result, these securities may offer a premium as a compensation for associated information deficiencies and/or because pricing inefficiencies exist as a result of the lack of information.
An analysis of 510 firms over a 10-year period indicates that the shares of those firms neglected by institutions outperform significantly the shares of firms widely held by institutions. The superior performance persists over and above any “small firm effect”; that is, both small and medium-sized neglected firms exhibit superior performance. The “neglected firm effect” suggests some potentially rewarding investment strategies for individuals and institutions alike.