Investor Recognition And The Efficiency Of Investor Recognition Measures

Investor recognition was firstly raised by Merton in the 1980's.He was suspicious of traditional asset pricing models based on frictionless markets and complete information,and raised his own investor recognition hypothesis.Merton assumes that:since the degree of incomplete information to investors is high,they will only know partial of all stocks,and optimize their portfolio holdings based on the set of stocks that they are informed about.Consequently,he pointed out the concept of investor recognition,that is,the level of investors knowing about all the stocks represents the degree of incomplete information they have.In 1987,Merton also built a simple model of capital market equilibrium under incomplete information.The equilibrium means that firm value and stock returns are significant correlation with the degree of investor recognition of the firm.The vast majority of previous studies provide empirical tests on Merton's assumption.At the same time,conflicts exist on which measure method is better.In China,our securities market has its own particularity,which is an emerging market with higher average degree of incomplete information to investors than that in developed market.As a result,nobody has discussed the fitness and effectiveness of investor recognition proxy indexes.To solve this dilemma,the purpose of this paper is to investigate the fitness and effectiveness of different investor recognition proxy indexes in Chinese securities market.Given the key role of investor recognition in finance research,identifying high quality proxies would permit investor recognition to be studied more intensively and effectively.Using multivariable cross-sectional analysis,we explore the relationship between different investor recognition proxies and stock returns,by which to identify effective proxies and their information gaining ability.We find that contemporaneous stock returns are positively related to the number of institutional investors and the breadth of institutional ownership,so they are effective proxies for semi-annual measurement intervals,and both of the number of institutional investors and the breadth of institutional ownership have incremental information content beyond each other.Nevertheless,the number of analysts following,the number of times analysts following and the number of shareholders are ineffective proxies for semi-annual,quarterly and monthly measurement intervals.