Is the Size Premium Really Driven by Firm Size
47 Pages Posted: 17 Jan 2017 Last revised: 30 May 2019
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 future returns. 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 relates the size premium to other known asset pricing phenomena, and we replicate these findings in a simple no-arbitrage valuation model with two factors. Our analysis provides new insights into the disappearance of the size premium and the behavior of new entrants.
Keywords: Firm Size, Size Premium, Decomposition
JEL Classification: G12
Suggested Citation: Suggested Citation