Does the Tail Wag the Dog? Small-Firm-Bias in Capital Market Research

52 Pages Posted: 22 Feb 2016

See all articles by Dan Givoly

Dan Givoly

Pennsylvania State University, Smeal College of Business

Carla Hayn

University of California at Los Angeles - Anderson School of Management

Ben Lourie

University of California, Irvine

Date Written: February 12, 2016

Abstract

We provide evidence showing that prominent anomalies documented by past accounting research, particularly those attributed to investor biases and lack of sophistication, are limited to small firms which collectively represent a small fraction (typically less than 10%) of the market value of the equity markets. When firm observations are weighted by their market value, none of these anomalies is economically significant. Our results are consistent with cognitive behavior and sophistication of investors as explanations for these anomalies rather than the improper measurement of risk. The findings emphasize the importance of putting these anomalies and other findings that have implications for market efficiency and resource allocation in perspective by assessing their economic importance.

Keywords: small firms bias, market value, accounting anomalies, market efficiency

JEL Classification: M4, G3

Suggested Citation

Givoly, Dan and Hayn, Carla and Lourie, Ben, Does the Tail Wag the Dog? Small-Firm-Bias in Capital Market Research (February 12, 2016). Available at SSRN: https://ssrn.com/abstract=2735856 or http://dx.doi.org/10.2139/ssrn.2735856

Dan Givoly (Contact Author)

Pennsylvania State University, Smeal College of Business ( email )

305 Business Building
University Park, PA 16802
United States
814-865-0587 (Phone)
814-863-8393 (Fax)

Carla Hayn

University of California at Los Angeles - Anderson School of Management ( email )

D410 Anderson Complex
Los Angeles, CA 90095-1481
United States
310-206-9225 (Phone)

Ben Lourie

University of California, Irvine ( email )

Irvine, CA 92697-3125
United States

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