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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References in periodicals archive ?
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.
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.
We question whether this assumption is valid and whether the small firm effect (SFE) truly exists in the markets or whether it is an artifact of the datasets that are studied.
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.
In section II we discuss the nature and significance of the small firm effects and further motivate our empirical section.

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