Work by Amihud and Mendelson (1986, 1991)
A) argues that investors will demand a rate of return premium to invest in less liquid stocks.
B) may help explain the small firm effect.
C) may be related to the neglected firm effect.
D) may help explain the small firm effect and may be related to the neglected firm effect.
E) All of the options are correct.

Question

Quizplus · Accepted Answer

Amihud and Mendelson's work suggests that investors require a higher return for investing in less liquid stocks, which can help explain both the small firm effect (where smaller firms often have less liquidity and thus higher expected returns) and the neglected firm effect (where less followed or less popular firms, often smaller and less liquid, also demand higher returns).