The Neglected and Small Firm Effects

Abstract This paper addresses the empirical question of whether the differential attention which companies receive affects the capital asset pricing process. The degree of attention was measured by research concentration rankings based on the number of analysts regularly following the firm's securities. The results suggest: (i) that there is a “neglected firm effect” in terms of superior performance for less researched companies and (ii) that the neglected firm effect persists over and above the small firm effect; namely, the excess returns are not fully attributable to size. The ex‐post capital asset pricing model is unable to account for the differences in return across security research ranking. Several possible explanations for the results are considered but not tested.