New evidence on structural and return characteristics of small and large firms

• Autor(a) principal: Pereira, Ana Margarida Fernandes
• Data de Publicação: 2023
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10400.14/41201
• topic: Size-effect; Marginal characteristics; NYSE; NASDAQ; Five-factor model; Efeito do tamanho; Características marginais; Modelo de 5 fatores; Domínio/Área Científica::Ciências Sociais::Economia e Gestão

Chan and Chen (1991) propose that the size premium is not related to size but rather to distress risk inherent to firms with marginal characteristics - high leverage, low efficiency and a recent cut in dividends. Since the publication of Fama and French (1992), the research on the size effect has completely shifted, with further investigation showing this pattern vanished during the mid-1980s. After applying the same methodology as Chan and Chen (1991) for 1956 and 2020, the present thesis confirms that small stocks do not necessarily earn higher returns than large stocks. By comparing NYSE and NASDAQ firms, I also show that it is not because a firm has the marginal characteristics that their return is necessarily higher. Furthermore, after the introduction of The Fama/French 5 factors model, portfolios LEV and DIV, designed to recreate the dynamics of marginal firms, lost and kept their significance in explaining portfolios’ average returns, respectively. Nevertheless, posterior cross-sectional analysis showed that the loading on DIV is not significant in explaining the difference in returns between small and large firms. The loadings on the VWNYS and LEV were the factors with the highest explaining power, which contradicts the Fama and French statement that ‘beta is dead’.