Does investor recognition matter for asset pricing?

In a world of market imperfections, what matters for asset prices differs from theory predictions based on perfect markets and information. In this paper, using a market setting where information costs are more pronounced, I show that the level of investor recognition/awareness matters for asset prices as predicted by Merton (1987). Using a novel dataset, I study the price effects of inclusions to and exclusions from a benchmark equity index in the context of emerging market assets. While testing for a number of existing hypotheses, I am able to document evidence for the 'investor recognition' hypothesis, using event study methodology. Furthermore, by making use of analysts' recommendations data, I show that there is a significant increase in coverage for the included stocks. This is also significantly related to the observed price change.