Resurrecting the size effect in Japan: Firm size, profitability shocks, and expected stock returns

Posted: 3 Sep 2021

See all articles by Muhammad A. Cheema

Muhammad A. Cheema

University of Otago New Zealand

Mardy Chiah

Swinburne University of Technology

Angel Zhong

RMIT University - School of Economics, Finance and Marketing

Date Written: August 21, 2021

Abstract

The size effect, whereby small firms outperform large firms, is not only a pervasive phenomenon in financial markets but also an important pricing factor in the Fama and French models (1993; 2018). However, several studies document that the size effect in recent decades has disappeared in the US and other international markets. Hou and Van Dijk (2019) show that the disappearance of the size effect can be attributed to profitability shocks in the US. This paper documents a weak size premium on the Tokyo Stock Exchange in Japan over the 1983–2014 period. Similar to the US, a strong size premium resurfaces after adjusting for the price impact of profitability shocks.

Keywords: Size effectJapanFirm characteristicsProfitabilityStock returns

JEL Classification: G11, G12, G14

Suggested Citation

Cheema, Muhammad A. and Chiah, Mardy and Zhong, Angel, Resurrecting the size effect in Japan: Firm size, profitability shocks, and expected stock returns (August 21, 2021). Pacific-Basin Finance Journal, Vol. 69, 2021, Available at SSRN: https://ssrn.com/abstract=3914545

Muhammad A. Cheema (Contact Author)

University of Otago New Zealand ( email )

Dunedin, 9016
New Zealand

Mardy Chiah

Swinburne University of Technology ( email )

Cnr Wakefield and William Streets, Hawthorn Victor
3122 Victoria, Victoria 3122
Australia

Angel Zhong

RMIT University - School of Economics, Finance and Marketing ( email )

Level 12, 239 Bourke Street
Melbourne, Victoria 3000
Australia

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