Size effect in China

Tianyang Li, Daye Li and Ming Men

Applied Economics, 2021, vol. 53, issue 37, 4358-4370

Abstract: This study seeks to explain the size effect in China. Our empirical results indicate that, after eliminating the smallest 30% of firms, the size premium is largely explained by the risk exposures of small firms to market and value factors, that cannot produce a unique alpha. Moreover, we find that the size premium is largest among high-quality and low-turnover stocks but becomes negligible after controlling for liquidity; the size effect is affected by how firm size is measured, and the price-based measure yields a more significant size premium than those yielded by fundamental-based measures; and strict IPO constraints result in shell values making up a large proportion of stock capitalization among small listed firms, and the shell value falsifies the measure of the size effect. Given that the registration system has been steadily promoted in the new STAR market, our results suggest that the shell values among stocks will decrease significantly, which has a long-term influence on the size effect in China.

Date: 2021
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DOI: 10.1080/00036846.2021.1899122

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