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Size Effect

Do the stocks of small firms consistently outperform those of larger companies? If so, why, and can investors/traders exploit this tendency? These blog entries relate to the size effect.

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19th Century Test of the Size and Value Factors

Are the size effect and the value premium peculiar to 20th century markets, or are they enduring characteristics of equity market behavior? In the January 2009 preliminary version of their paper entitled “The Asset Pricing Anomalies in 19th Century Britain”, Qing Ye, Charles Hickson and John Turner measure the size and value anomalies using an original 19th century dataset. Using monthly stock prices and annual dividends for 1,051 stocks traded on the London Stock Exchange during March 1825 to December 1870, they conclude that: Keep Reading

Value Premium and Size Effect in Australia

Do stocks in Australia confirm pervasiveness of the value premium and the size effect? In their August 2008 paper entitled “Size and Book-to-market Factors in Australia”, Michael O’Brien, Tim Brailsford and Clive Gaunt measure the value premium and the size effect in the Australian market. Using company-specific accounting information from annual reports and contemporaneous stock prices for 98% of all Australian listed firms during 1982-2006 (25 years), they conclude that: Keep Reading

Momentum Returns for Large Caps

Are momentum trading strategies reliable and economically significant after trading frictions for large-capitalization stocks? In his November 2006 paper entitled “Alpha Generating Momentum Strategies”, Gregor Obrecht test 32 momentum trading strategies on large-capitalization U.S. stocks. The strategies encompass all combinations of: formation periods of three, six, nine and 12 months; wait periods of zero months and one month; and, holding periods of three, six, nine and 12 months. Using monthly returns for S&P 100 stocks over the period 12/85-8/06, he concludes that: Keep Reading

Persistence of the January Effect

Is an adaptive marketplace extinguishing the January effect? In their June 2008 paper entitled “The Persistence of the Small Firm/January Effect: Is it Consistent with Investors’ Learning and Arbitrage Efforts?”, Kathryn Easterday, Pradyot Sen and Jens Stephan investigate whether the stock market has adapted over time to diminish the small firm/January effect. Using returns and firm size data for a very large sample of stocks over three subperiods (1946-1962, 1963-1979, 1980-2007), they conclude that: Keep Reading

A Drag on Capitalization-weighted Portfolios?

Why do equal-weighted portfolios tend to outperform capitalization-weighted portfolios? Is this tendency related to the size effect? In the May 2008 update of their paper entitled “The Effect of Value Estimation Errors On Portfolio Growth Rates”, Robert Ferguson, Dean Leistikow, Joel Rentzler and Susana Yu examine how value estimation (stock valuation) errors affect long-term returns for several portfolio weighting methods. Based on simple assumptions and general statistical analysis, they conclude that: Keep Reading

The Behavioral Asset Pricing Model

Do investors price stocks based mostly on rational analysis or feelings? In their February 2008 paper entitled “Affect in a Behavioral Asset Pricing Model”, Meir Statman, Kenneth Fisher and Deniz Anginer use survey results to investigate both the objective and subjective (perceived) connections between risk and return. Using results of: (1) the 1982-2006 annual Fortune surveys of senior executives, directors and security analysts regarding the long-term investment value of companies; and (2) May and July 2007 surveys of high-net worth clients of a large investment firm, they conclude that: Keep Reading

Fama and French Dissect Anomalies

Which stock return anomalies are trustworthy, and which are not? In the June 2007 draft of their paper entitled “Dissecting Anomalies”, Eugene Fama and Kenneth French apply both sorts and regressions to examine the robustness of the momentum, net stock issuance, accruals, profitability and asset growth anomalies. They note that sorts on an anomaly variable offer a simple picture of how average returns vary, but microcaps (a few big stocks) can dominate the performance of a sort-based equal-weighted (value-weighted) hedge portfolio. In addition, sorts are ill-suited to determinations of: (1) the exact relationship between an anomaly variable and returns, and (2) relationships among anomalies. They note also that extreme behavior by microcaps and outliers generally can distort inference from regressions. Using a robust set of firm data for a broad set of U.S. stocks allocated to three size groups (microcap, small and big) over the period 1963-2005, they conclude that: Keep Reading

Jim Cramer’s Gaps and Reversals

Are Jim Cramer’s stock recommendations on CNBC’s Mad Money most meaningful for small-capitalization stocks, for which prices are most susceptible to influence by the concerted behavior of a group of individual investors? In their September 2007 working paper entitled “The Performance and Impact of Stock Picks Mentioned on Mad Money, Bryan Lim and Joao Rosario evaluate the show’s ability to move markets over the short term and to forecast winners and losers over the long term. Using a sample of 10,589 Mad Money buy and sell recommendations representing 2,074 distinct firms, either initiated by Jim Cramer or provided by him in response to callers, from shows aired between June 28, 2005 and December 22, 2006, they conclude that: Keep Reading

Australian Stock Market Anomalies

Are anomalies observed with varying and changing levels of confidence among U.S. stocks, such as the size effect and the value premium, evident among stocks of other countries? In their recent paper entitled “Anomalies and Stock Returns: Australian Evidence”, Philip Gharghori, Ronald Lee and Madhu Veeraraghavan test for the existence among Australian stocks of a size effect, book-to-market effect, earnings-to-price (E/P) effect, cash flow-to-price (C/P) effect, leverage (debt-to-equity) effect and liquidity (share turnover) effect. Using stock price data for 1/92-12/05 and associated accounting data for 1/92-12/04, they conclude that: Keep Reading

The Size Effect in Up and Down Markets

Does the size effect, the tendency of small capitalization stocks to outperform, hold in both advancing and declining markets? In their March 2007 paper entitled “Stock Market Returns and Size Premium”, Jungshik Hur and Vivek Sharma explore how the size premium differs when the overall stock market is moving up and down. Using monthly return data for a sample of NYSE/AMEX stocks for July 1931 through December 2004 and NASDAQ stocks for June 1975 through December 2004, they conclude that: Keep Reading

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