Does the Tail Wag the Dog? Small-Firm-Bias in Capital Market Research
52 Pages Posted: 22 Feb 2016
Date Written: February 12, 2016
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: Suggested Citation