Summary
In this paper, I will review the size effect, potential reasons why one observes the size effect, and correct common misconceptions and address criticisms of the Size Premia (SP). Specifically, we demonstrate that the size premium critique by Cliff Ang is not warranted and that the alternative methodology proposed by that author is misleading and cannot be considered as an alternative to the Duff & Phelps’ SP. Subsequently, we will highlight some methodological issues with his proposed alternative. The methodology the author is proposing is picking up the statistical errors that he was set to avoid by proposing the same methodology. I will discuss other criticisms we have encountered. Finally, I will provide some practical guidance on applying SP.
The Size Effect Continues To Be Relevant When Estimating the Cost of Capital
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