Resurrecting the Size Effect: Firm Size, Profitability Shocks, and Expected Stock Returns

Kewei Hou; Mathijs A. Van Dijk

doi:10.1093/rfs/hhy104

Review of Financial Studies Vol. 32 No. 7 2019

Resurrecting the Size Effect: Firm Size, Profitability Shocks, and Expected Stock Returns

Kewei Hou¹; Mathijs A. Van Dijk²

¹ Fisher College of Business, The Ohio State University and China Academy of Financial Research (CAFR) · ² Rotterdam School of Management Erasmus University

open access

Abstract

Many studies report that the size effect in the cross-section of stock returns disappeared after the early 1980s. This paper shows that its disappearance can be attributed to negative shocks to the profitability of small firms and positive shocks to big firms. After adjusting for the price impact of profitability shocks, we find a robust size effect in the cross-section of expected returns after the early 1980s. Our results highlight the importance of in-sample cash-flow shocks in understanding cross-sectional return predictability.Received April 2, 2014; editorial decision August 6, 2018 by Editor Laura Starks.

DOI: 10.1093/rfs/hhy104
Volume: 32
Issue: 7
Pages: 2850-2889
Language: en
Sources: bibtex:phds-export.bib openalex crossref

Resurrecting the Size Effect: Firm Size, Profitability Shocks, and Expected Stock Returns

Abstract

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