Small firms have delivered higher returns than large firms on average and Chapter 12 gets to the underlying fundamentals that explain it. Yes: growth at risk. The chapter also reports that the size premium has changed over time. Here is the history of the premium for five-year periods from 1963-2020. Note the lower premium from 1983-1997 and the higher premium in more recent years, 2008-2020.
Source: Penman, S. and F. Reggiani. 2025. A Fundamental Explanation for the Size Effect in Returns and its Variation Over Time, forthcoming, Journal of Accounting, Auditing, and Finance. At https://ssrn.com/abstract=4180896.
| Size Portfolios | 1963-1967 | 1968-1972 | 1973-1977 | 1978-1982 | 1983-1987 | 1988-1992 | 1993-1997 | 1998-2002 | 2003-2007 | 2008-2012 | 2013-2017 | 2018-2020 |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Small | 0.463 | -0.078 | 0.306 | 0.393 | -0.010 | 0.188 | 0.109 | 0.408 | 0.029 | 0.359 | 0.007 | 0.884 |
| Large | 0.132 | -0.002 | 0.146 | 0.233 | 0.128 | 0.125 | 0.140 | 0.086 | 0.023 | 0.237 | 0.090 | 0.329 |
| Difference | 0.331 | -0.076 | 0.160 | 0.160 | -0.137 | 0.063 | -0.031 | 0.322 | 0.006 | 0.122 | -0.082 | 0.555 |
