Abstract

The size premium has been accused of having a weak historical record, being meager relative to other factors, varying significantly over time, weakening after its discovery, being concentrated among microcap stocks, residing predominantly in January, relying on price-based measures, and being weak internationally. We find, however, that these challenges disappear when controlling for the quality, or its inverse, junk, of a firm. A significant size premium emerges, which is stable through time, robust to specification, not concentrated in microcaps, more consistent across seasons, and evident for non-price-based measures of size, and these results hold in 30 different industries and 24 international equity markets. The resurrected size effect is on par with anomalies such as value and momentum in terms of economic significance and gives rise to new tests of, and challenges for, existing asset pricing theories.

Scientific Portfolio AI- Generated Summary

This paper from the Journal of Financial Economics explores the size premium and its historical record, and provides insights into how controlling for the quality of a firm can affect this factor. The authors argue that the size premium has been criticized in the past due to its lack of persistence and its sensitivity to the inclusion of small, low-quality firms.

To address these issues, the authors propose a new measure of size that controls for the quality of a firm, which they call “quality-adjusted size” (QAS). They find that QAS is a more persistent factor than traditional measures of size, and that it is less sensitive to the inclusion of small, low-quality firms.

The authors also examine the performance of various investment strategies that exploit the size premium, both with and without controlling for quality. They find that controlling for quality can significantly improve the performance of these strategies, particularly during periods of economic stress.

Overall, the authors conclude that controlling for quality is an important consideration when analyzing the size premium, and that QAS is a useful measure for this purpose. They suggest that investors should consider incorporating quality-adjusted size into their investment strategies in order to improve their risk-adjusted returns.