Is the Size Premium Really Driven by Firm Size
41 Pages Posted: 17 Jan 2017 Last revised: 16 Sep 2018
Date Written: September 1, 2018
Not really. Decomposing firm size into horizon-based components, we find that size five years ago explains 80% of the current size but has little predictive power for the return. In contrast, the change in size over the prior two to five years explains only 18% of the size but completely captures the size premium. Our decomposition suggests that illiquidity and exposures to cash flow news and variance news are likely to be the economic drivers of the size premium. Our analyses provide new insights into the disappearance of the size premium, the January effect, and the behavior of new entrants.
Keywords: Firm Size, Size Premium, Decomposition
JEL Classification: G12
Suggested Citation: Suggested Citation