The Return of the Size Anomaly: Evidence from the German Stock Market
University of Cambridge, Judge Business School Working Paper No. 23/2006
70 Pages Posted: 16 Jan 2007 Last revised: 5 Jul 2009
Date Written: December 30, 2008
This paper examines the size-effect in the German stock market and intends to address several unanswered issues on this widely known anomaly. Unlike recent evidence of a reversal of the size anomaly we document a conditional relation between size and returns. We also detect strong momentum across size portfolios. Our results indicate that the marginal effect of firm size on stock returns is conditional on the firm’s past performance. We use an instrumental variable estimation to address Berk’s critique of a simultaneity bias in prior studies on the small firm effect and to investigate the economic rationale behind firm size as an explanatory variable for the variation in stock returns. The analysis in this paper indicates that firm size captures firm characteristic components in stock returns and that this regularity cannot be explained by differences in systematic risk.
Keywords: Size-effect, capital market anomaly, CAPM, efficient markets, momentum
JEL Classification: G12, G14, C21, C31
Suggested Citation: Suggested Citation