Does Firm Size Predict Stock Returns? Evidence from the London Stock Exchange

46 Pages Posted: 14 May 2004

See all articles by George N. Leledakis

George N. Leledakis

Athens University of Economics and Business - Department of Accounting and Finance

Ian Davidson

Loughborough University - Business School

Jeremy Smith

University of Warwick - Department of Economics

Abstract

This paper provides further international evidence that the well-known size effect, whereby firms with smaller equity capitalizations consistently generate higher stock returns on average, is not due to a general relation between expected stock return and actual firm size. Our empirical evidence, which uses data from the London Stock Exchange, leads to conclusions that are generally consistent with the findings by Berk (1997) for US data and Garza-Gomez et al (1998) for Japanese data, although in comparison with the latter case we do not find that the non-market value size variables are significant in explaining returns on a univariate basis. Our analysis uses a large sample of UK stocks and employs a number of methodologies including one and two-dimensional classification, cross sectional regression and the 'Seemingly Unrelated Regression' (SUR) technique. We then present evidence that the inverse relationship between market equity and stock returns is primarily driven by small, highly leveraged companies.

Keywords: Firm size,Non market value size variables,Stock Returns

JEL Classification: G10,G12

Suggested Citation

Leledakis, George N. and Davidson, Ian R. and Smith, Jeremy P., Does Firm Size Predict Stock Returns? Evidence from the London Stock Exchange. Available at SSRN: https://ssrn.com/abstract=492283 or http://dx.doi.org/10.2139/ssrn.492283

George N. Leledakis (Contact Author)

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece
+30 210 8203 459 (Phone)
+30 210 8228 816 (Fax)

HOME PAGE: http://www.aueb.gr/en/faculty_page/leledakis-georgios

Ian R. Davidson

Loughborough University - Business School ( email )

Ashby Road
Loughborough
Nottingham NG1 4BU, LE11 3TU
Great Britain

Jeremy P. Smith

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom

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