Does Firm Size Predict Stock Returns? Evidence from the London Stock Exchange
46 Pages Posted: 14 May 2004
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
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