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Sizing Up The Size Premium

Sizing Up The Size Premium by by Gerstein Fisher

Since Rolf Banz published his groundbreaking paper that identified the so-called “small stock effect” in 1981, the investment community has acknowledged the existence of a return premium afforded to smaller-capitalization stocks over their larger counterparts. Banz’s study demonstrated that between 1926 and 1980, the smallest quintile of the stocks on the New York Stock Exchange outperformed both large stocks and the overall market.

Between 1961 and 1980, the size premium earned an annualized return of a full 5%. From the time the Banz paper was published through the end of 2014, however, that premium shrank to closer to 1%. So is it possible that the size premium is a result of data mining or biases in the historical data, but does not hold in reality? This paper explores this question, as well as some of the key theoretical arguments as to why a size premium should exist – and persist into...