Structural and Return Characteristics of Small and Large Firms

K C Chan and Nai-Fu Chen

Journal of Finance, 1991, vol. 46, issue 4, 1467-84

Abstract: The authors examine differences in structural characteristics that lead firms of different sizes to react differently to the same economic news. They find that a small firm portfolio contains a large proportion of marginal firms--firms with low production efficiency and high financial leverage. The authors construct two size-matched indices designed to mimic the return behavior of marginal firms and find that these return indices are important in explaining the time-series return difference between small and large firms. Furthermore, risk exposures to these indices are as powerful as log(size) in explaining average returns of size-ranked portfolios. Copyright 1991 by American Finance Association.

Date: 1991
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