The resurrected size effect still sleeps in the (monetary) winter

Marc W. Simpson and Axel Grossmann

International Review of Financial Analysis, 2024, vol. 92, issue C

Abstract: In this paper, we provide evidence that the size premium (SMB) is more significantly related to monetary policy than to firm quality or to business cycle troughs. Across both economic expansion and contraction periods, whether we control for firm quality or not, we show that monetary tightening eliminates the size premium and easing of policy re-instates it. We further demonstrate that the effect holds even outside of business cycle troughs as found by Ahn et al. (2019). The channels through which monetary policy affects small firms differently than large firms are identified, such as a stock market liquidity effect, a firm-level liquidity effect and increased access to credit. Our findings indicate that monetary policy is an important factor to consider when assessing the size premium, and apparently more important than firm quality, and the business cycle.

Keywords: Size premium; Factor models; Quality; Monetary policy; Liquidity (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G15 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:92:y:2024:i:c:s1057521924000139

DOI: 10.1016/j.irfa.2024.103081

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