If you’re a subscriber to BVResearch Pro, you have access to a vast amount of research material, including the full archive of Business Valuation Review, the journal of the American Society of Appraisers (ASA). The journal’s Fall 2018 issue is devoted to the ‘‘size effect’’ with respect to the cost of capital. Some appraisers feel that the size effect has diminished or disappeared since it was first documented in 1981. Other appraisers feel it is alive and well. There are two articles on this—one by Clifford Ang (Compass Lexecon) that questions the evidence that there is a size effect with respect to the cost of equity. Ang concludes that “size effect studies have not been able to surmount the criticisms that the size effect lacks a theoretical basis and that the results of size effect studies are susceptible to data mining criticisms.” The second article, by Roger Grabowski (Duff & Phelps), takes a differing view. There are also two articles, one by James K. Herr (Alvarez & Marsal) and the other by Vincent Covrig (Crowe LLP) and his coauthors, that deal with volatility measurements and company size.

One reason for the differing views on the existence of the size effect is the time horizon of historical returns that is used. If you look at the last 35 years, the size effect is very different than if you go all the way back to the 1920s. You can clearly see this difference if you use the Cost of Capital Professional platform, which gives you control over the time horizon of historical return data that are appropriate for your case. That is, professional judgment is required in choosing the part of history you believe best represents investor expectations of the future.