Article says the size effect didn’t vanish—it never existed

BVWireIssue #217-1
October 7, 2020

cost of capital
cost of capital, discount rate, private company valuation, risk analysis, cost of equity, size effect

The hits keep coming to the existence of the size effect. A new article in Bloomberg points out that many financial veterans are “concluding that the small-company effect does not, after all, exist.” The Russell indexes show that the factor is “muted at best,” and sophisticated statistical work confirms it. It also points to several recent papers, including one by Cliff Asness (AQR), who studied for his doctorate under Eugene Fama at the University of Chicago. One finding of that paper, “There is No Size Effect,” which we covered here, is that, since the size effect was originally identified in the early 1980s, a “series of cumulative challenges, many of which we have summarized …, all have reduced the historic ‘net of market beta’ return to small vs. large, ultimately leaving nothing.” The article also points to another recent paper, “Settling the Size Matter,” that “nearly resurrects a narrower version of the small-company effect, before finding that it is close to impossible to exploit,” the article says.
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