Three analyses of the firm size premium

Abstract

The size premium for smaller companies is one of the best-known academic market anomalies. The relevant issue for investors is whether size premium for small-cap stocks is still positive, and, if so, whether its magnitude is substantial. In our analysis, we use annual compounded returns, monthly cross-sectional regressions, and linear spline regressions to investigate the relation between expected returns and firm size during 1980-1996. All three methodologies report no consistent relationship between size and realized returns. Hence, our results show that the widespread use of size in asset pricing is unwarranted. © 2000 Elsevier Science B.V.