Is the Size Premium Really Driven by Firm Size

47 Pages Posted: 17 Jan 2017 Last revised: 30 May 2019

See all articles by Zhiyao Chen

Zhiyao Chen

The Chinese University of Hong Kong (CUHK) - Department of Finance

Jun Li

University of Texas at Dallas

Huijun Wang

University of Melbourne

Date Written: September 1, 2018

Abstract

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

Chen, Zhiyao and Li, Jun and Wang, Huijun, Is the Size Premium Really Driven by Firm Size (September 1, 2018). Available at SSRN: https://ssrn.com/abstract=2899944 or http://dx.doi.org/10.2139/ssrn.2899944

Zhiyao Chen

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong

Jun Li (Contact Author)

University of Texas at Dallas ( email )

800 West Campbell Road, SM 31
Richardson, TX 75080
United States
972-883-4422 (Phone)

Huijun Wang

University of Melbourne

198 Berkeley Street
Carlton, Victoria 3053
Australia

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