Size premium or size discount? – A dynamic capital mobility based interpretation

Abstract

Purpose The size effect that there exist return differences between small market-cap firms and large market-cap counterparts in the stock market has become one of the most controversial capital market anomalies. This paper aims to interpret this effect, including both the size premium and the size discount. Design/methodology/approach A dynamic capital mobility model (DCMM) is proposed, and the model’s explanatory ability is validated via simulation. Findings This study’s simulation results indicate that the observed size effect can be originated from the combination of the pure size effect and the investors’ herding behavior. Although the size premium, that average returns of small firms are higher than those of large firms, is more prevalent in the stock market, this study’s model implies that the size discount is also possible, which is largely an empirical issue. The pure size effect per se cannot reproduce the size premium. Only if the herding effect dominates the pure size effect would there exist the size premium. Originality/value Although the literature provides miscellaneous explanations for the size effect, they are still inconclusive. So far there has been no theory to directly investigate the size effect and to explicitly explore the impact of investors’ trading behavior on the size effect. To the best of the author’s knowledge, this paper fills in this gap and proposes a DCMM to interpret the size effect for the first time. In addition, while the literature focuses on the size premium only, this study covers not only the size premium but also the size discount.

The impact of economic policy uncertainty on stock types while considering the economic cycle. A quantile regression approach

“…Since investor sentiment contributes to size premium (Qadan and Aharon, 2019;Song, 2023), EPU impact is especially negative for small-cap stocks (Killins et al, 2022), and given that size premium is related to the uncertainty with macroeconomic production and aggregate consumption (Scheurle and Spremann, 2010), we test the following hypothesis:…”