In our paper, we introduced the concept of a Quality-Minus-Junk (QMJ) factor that captured this phenomenon. The perhaps surprising result is that despite this discount and premium in pricing, quality stocks strongly and significantly outperform junk stocks. Junk stocks unsurprisingly trade at a discount while their high-quality counterparts - those firms that are profitable, growing, low risk and have high payouts to investors - as expected command a premium. The answer to “Is there a size premium?” lies in measuring stock quality, or its opposite, “junk.” As defined in our earlier working paper, junk companies have poor profitability, stagnant growth, high risk and low payouts to investors. These assaults have rendered the pure small-cap premium as marginally significant, at best, and “not real” at worst.īut, of course, this is where our story gets interesting. after it was documented and published, and has since been even weaker internationally, suffering from long periods of poor performance, and being concentrated in extreme, less-liquid microcap stocks, with nearly all of the evidence of a size premium being concentrated in a single month, January. More notably, size has had an extended weak period in the U.S. Many observe the historical record of the small-cap effect being weaker and more sporadic than other effects, such as value and momentum, for instance. Since its discovery, the size effect has come under heavy scrutiny, being challenged on many fronts. It forms a key ingredient for pricing stocks by way of factor models, determines in part how funds are categorized, and of course led to the introduction and widespread use of small-cap funds.īut actually finding, capturing and even measuring, the size premium - as distinct from the market - has, for almost as long a time, presented a challenge for investors and researchers. Over this time, the small-cap, or size, effect has become an important consideration for investors.
The idea of earning a premium for investing in smaller companies has been around since at least the early 1980s, and likely even earlier. So, how can it be that size does indeed still matter? I’ll get to that, but first a little background. After so many years of intensive research questioning the efficacy of the size effect, that it can be emphatically revived may seem a bit far-fetched. In a new paper, we resurrect the size premium and restore it to its proper place alongside such stalwarts as value and momentum in terms of its efficacy and robustness. Does size matter? Certainly in financial markets, many researchers have questioned whether it does.