Is the size premium really driven by firm size?

Zhiyao CHEN, Jun LI, Huijun WANG

Research output: Journal PublicationsJournal Article (refereed)peer-review


By decomposing firm size into horizon-based components, the authors find that the changes in firm size in prior years, instead of its recent level, drive the size premium. Specifically, size five years ago explains 80% of the current firm size but has little predictive power for the size premium. In contrast, the change in size over the prior two to five years explains only 18% of the size but almost completely captures the size premium. Their decomposition indicates that not all small stocks earn a size premium. Only small stocks that had significant losses in market value in the prior two to five years earn a premium. This analysis also offers new insights into the disappearance of the size premium and the return behaviors of new entrants.

Original languageEnglish
Pages (from-to)127-143
Number of pages17
JournalJournal of Investing
Issue number5
Publication statusPublished - Aug 2021
Externally publishedYes


  • Analysis of individual factors/risk premia
  • Performance measurement*
  • Quantitative methods
  • Security analysis and valuation
  • Statistical methods

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