Can Overreaction Explain Part of the Size Premium?

International Journal of Revenue Management, 2008, Vol.2, Issue 3.

28 Pages Posted: 11 Dec 2006 Last revised: 20 Aug 2008

See all articles by K. Ozgur Demirtas

K. Ozgur Demirtas

Sabanci University Graduate School of Management

A. Burak Guner

Citadel

Date Written: 2006

Abstract

This paper uncovers several new empirical regularities in the historical returns of small stocks. First, within the sample of firms that have low market capitalizations, stocks with low past profitability ("laggers") bring returns significantly higher than those of stocks with high past profitability ("leaders"). Second, the well-documented size premium (i.e., the risk-adjusted returns to small stocks) is generated largely by small laggers. Moreover, both patterns are particularly pronounced at earnings-announcement dates, suggesting that unexpected earnings growth can explain a portion of the abnormal returns to small stocks.

Keywords: Small-firm effect, Anomalies, Overreaction, Profitability

JEL Classification: G10, G12, G14

Suggested Citation

Demirtas, K. Ozgur and Guner, A. Burak, Can Overreaction Explain Part of the Size Premium? (2006). International Journal of Revenue Management, 2008, Vol.2, Issue 3., Available at SSRN: https://ssrn.com/abstract=950136 or http://dx.doi.org/10.2139/ssrn.950136

K. Ozgur Demirtas (Contact Author)

Sabanci University Graduate School of Management ( email )

Sabanci University, School of Management
Orhanli Tuzla
Orhanlı-Tuzla, Istanbul, 34956
Turkey
(+90) 216-483-9985 (Phone)
(+90) 216-483-9699 (Fax)

A. Burak Guner

Citadel ( email )

Chicago, IL 60603
United States

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