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

Abstract

Chan and Chen (1991) propose that the size premium is not related to size but rather todistress risk inherent to firms with marginal characteristics - high leverage, low efficiency anda recent cut in dividends. Since the publication of Fama and French (1992), the research onthe size effect has completely shifted, with further investigation showing this pattern vanishedduring the mid-1980s. After applying the same methodology as Chan and Chen (1991) for1956 and 2020, the present thesis confirms that small stocks do not necessarily earn higherreturns than large stocks. By comparing NYSE and NASDAQ firms, I also show that it is notbecause 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 andDIV, designed to recreate the dynamics of marginal firms, lost and kept their significance inexplaining portfolios’ average returns, respectively. Nevertheless, posterior cross-sectionalanalysis 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 statementthat ‘beta is dead’.

Date of Award	25 Jan 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Pedro Barroso (Supervisor)