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Information and Prospects: Investment Opportunities and Market Efficiency in the Small-Cap Segment
Germán López-Espinosa and Róbert F. Veszteg |
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In the presence of asymmetric information markets may fail to render efficient outcomes. In this paper we study the market of small firms because information takes longer to be reflected in asset prices there than in the case of large firms. We analyze data from the North American and the Eurozone capital markets, and look for excess returns among small firms with the best prospects. Our empirical results prove that investors can discover unexploited investment opportunities and obtain abnormal returns with the help of analysts as information intermediaries. Notwithstanding, it seems that results are similar in North America and in the most developed part of Eurozone, but not for the other part. The paper offers a simple game theoretic argument, too, that accounts for the empirical findings from a theoretical point of view. In particular, we show that the portfolio that analysts follow represents a good investment opportunity due to a self-selection process among firms in the small-cap segment.
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