Resurrecting the Size Effect: Firm Size, Profitability Shocks, and Expected Stock Returns
Charles A. Dice Center Working Paper No. 2010-1
Fisher College of Business Working Paper No. 2010-03-001
Review of Financial Studies, Forthcoming
64 Pages Posted: 18 Jan 2010 Last revised: 11 Sep 2018
Date Written: September 10, 2018
Abstract
Many studies report that the size effect in the cross-section of stock returns disappeared after the early 1980s. This paper shows that its disappearance can be attributed to negative shocks to the profitability of small firms and positive shocks to big firms. After adjusting for the price impact of profitability shocks, we find a robust size effect in the cross-section of expected returns after the early 1980s. Our results highlight the importance of in-sample cash-flow shocks in understanding cross-sectional return predictability
Keywords: Size effect, Expected stock returns, Profitability shocks, Asset pricing tests
JEL Classification: G12, G14, G15, M41
Suggested Citation: Suggested Citation
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