The Resurrected Size Effect Still Sleeps in the (Monetary) Winter

29 Pages Posted: 27 Feb 2023

See all articles by Marc William Simpson

Marc William Simpson

The John B. and Lillian E. Neff Department of Finance, University of Toledo

Axel Grossmann

Georgia Southern University

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Abstract

In this paper, we provide evidence that the size premium (SMB) is more significantly related to monetary policy than to firm quality or to business cycle troughs. Across both economic expansion and contraction periods, whether we control for firm quality or not, we show that monetary tightening eliminates the size premium and easing of policy re-instates it. We further demonstrate that the effect holds even outside of business cycle troughs as found by Ahn et al. (2019). The channels through which monetary policy affects small firms differently than large firms are identified, such as a stock market liquidity effect, a firm-level liquidity effect and increased access to credit. Our findings indicate that monetary policy is an important factor to consider when assessing the size premium, and apparently more important that firm quality, and the business cycle.

Keywords: Size premium, Factor models, Quality, monetary policy, Liquidity

Suggested Citation

Simpson, Marc W. and Grossmann, Axel, The Resurrected Size Effect Still Sleeps in the (Monetary) Winter. Available at SSRN: https://ssrn.com/abstract=4361324 or http://dx.doi.org/10.2139/ssrn.4361324

Marc W. Simpson (Contact Author)

The John B. and Lillian E. Neff Department of Finance, University of Toledo ( email )

Toledo, OH 43606
United States

Axel Grossmann

Georgia Southern University ( email )

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