The Size Premium in a Granular Economy

73 Pages Posted: 8 Nov 2023 Last revised: 21 Nov 2023

See all articles by Logan P. Emery

Logan P. Emery

Rotterdam School of Management, Erasmus University

Joren Koëter

Rotterdam School of Management, Erasmus University

Date Written: September 17, 2024

Abstract

We investigate how stock market concentration impacts the difference in returns between small and large firms (i.e., the size premium).  Concentration may increase expected returns for large firms due to the inability to diversify their idiosyncratic risk (i.e., granularity), but it also may increase expected returns for small firms due to capital misallocation.  We find that concentration increases the size premium by 13.33 percentage points per annum, indicating the capital allocation effect dominates. A variety of tests provide further evidence of this capital allocation effect. Nonetheless, we also find evidence that the size premium weakens following idiosyncratic increases in granularity.

Keywords: Granularity, Size Premium, Concentration, Asset Pricing, Capital Allocation,

JEL Classification: G11, G12, G14, G17

Suggested Citation

Emery, Logan and Koëter, Joren, The Size Premium in a Granular Economy (September 17, 2024). Available at SSRN: https://ssrn.com/abstract=4597933 or http://dx.doi.org/10.2139/ssrn.4597933

Logan Emery (Contact Author)

Rotterdam School of Management, Erasmus University ( email )

RSM Erasmus University
PO Box 1738
Rotterdam, 3062 PA
Netherlands

Joren Koëter

Rotterdam School of Management, Erasmus University ( email )

RSM Erasmus University
PO Box 1738
Rotterdam, 3062 PA
Netherlands

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