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

See all articles by Kewei Hou

Kewei Hou

Ohio State University (OSU) - Department of Finance

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM)

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

Hou, Kewei and Van Dijk, Mathijs A., Resurrecting the Size Effect: Firm Size, Profitability Shocks, and Expected Stock Returns (September 10, 2018). Charles A. Dice Center Working Paper No. 2010-1 ; Fisher College of Business Working Paper No. 2010-03-001; Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1536804 or http://dx.doi.org/10.2139/ssrn.1536804

Kewei Hou (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-0552 (Phone)
614-292-2418 (Fax)

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
+31 10 408 1124 (Phone)
+31 10 408 9017 (Fax)

HOME PAGE: http://mathijsavandijk.com/

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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