The smallest firm effect: An international study

Lieven De Moor and Piet Sercu

Journal of International Money and Finance, 2013, vol. 32, issue C, 129-155

Abstract: Using a carefully screened and filtered international database with a wide coverage across countries and size classes, this paper identifies and documents a post-1980s size effect which is persistent, not picked up by a Fama–French-style SMB, and largely due to the smallest-decile stocks. We test for potential explanations (such as market risk, infrequent trading, financial distress risk, missing book values, momentum, liquidity risk, changing business conditions, January effect, exchange risk, time-varying risk loadings and dividend yield effects), but none can quite explain the international size effect, whether separately or jointly. Fully identifying the missing risk factor is beyond the scope of this paper but we do find that dividend yield shows up as a significant characteristic in the cross-section of risk-adjusted returns, even after controlling for time-varying risk loadings linearly related to dividend yield. When we construct two ad-hoc risk factors that jointly capture the documented size effect, and then correlate these factors with characteristics-based portfolios, we likewise find that especially dividend yield seems to play an important role in the missing risk factor. More generally, this paper revives the debate on the small-firm effect and, we hope, will stimulate further research on a class of stocks that are too interesting to ignore.

Keywords: Forex; Exposure; Anomaly; Fama; French; Dividend yield; Liquidity; Missing factor; Size effect; Small firm (search for similar items in EconPapers)
JEL-codes: C13 C22 G11 G12 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Working Paper: The Smallest Firm Effect: an International Study (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:32:y:2013:i:c:p:129-155

DOI: 10.1016/j.jimonfin.2012.04.002

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