Resurrecting the size effect in Japan: Firm size, profitability shocks, and expected stock returns

Abstract

The size effect, whereby small firms outperform large firms, is not only a pervasive phenomenon in financial markets but also an important pricing factor in the Fama and French models (1993; 2018). However, several studies document that the size effect in recent decades has disappeared in the US and other international markets. Hou and Van Dijk (2019) show that the disappearance of the size effect can be attributed to profitability shocks in the US. This paper documents a weak size premium on the Tokyo Stock Exchange in Japan over the 1983–2014 period. Similar to the US, a strong size premium resurfaces after adjusting for the price impact of profitability shocks.