Small Firm Effect

Small Firm Effect

A theory stating that publicly-traded companies with low market capitalization tend to outperform larger ones. Part of the small firm effect may be explained by the fact that these firms are riskier and, therefore, have higher returns. Additionally, small firms have lower stock prices and, thus, what would be a small price appreciation for a large firm can, in fact, be huge for a small firm. See also: Neglected-firm effect.
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It involves the so-called Fama-French Small Firm Effect, which came out of the University of Chicago in the early 1980s.
Kohers and Kohli (1991) provided evidence that the January effect is not related to small firm effect.
Whaley, 1983, Transactions costs and the small firm effect, Journal of Financial Economics 12, 57-80.
Many mutual funds and institutions subsequently exploit this small firm effect by purchasing small capitalization stocks.
This revised return series appears to provide even stronger support for the investor sentiment hypothesis, but it also hints of a January small firm effect.
These findings suggest that, although institutions may be creating part of the small firm effect in January by buying small firms in their first quarter, they are probably not part of the small firm effect in December by selling small firms in their last quarter.
After reviewing the relevant literature on the small firm effect, McMahon rom.
The tendency of small firms to have greater risk-adjusted security returns than larger companies is referred to as the small firm effect.
This paper questions whether investors should consider the small firm effect.
The choice of the market value as a proxy variable for the thinness of a security and the relationship between intervalling effect bias in beta and thinness would suggest that the intervalling effect could explain the size or small firm effect discovered by Banz (1981).
In spite of the 1986 tax law changes the January small firm effect persisted.
The paper presents evidence on these tendencies, or small firm effects, and goes on to elaborate on how they might impact cost of capital for new issues.

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