Although most empirical studies find that the size effect has disappeared since the early 1980s, it shows up during times of high macroeconomic volatility, according to a new paper. For instance, high uncertainty triggers changes in bank lending policies, which hamper small firms’ ability to raise capital, the paper points out, and investors would require higher returns from credit-constrained small companies. The paper, which examines the U.S. and U.K. equity markets, also finds that, in those markets, “recession itself would not hamper raising capital for the small firms unless it coincides with the high uncertainty.” For example, the 2008 financial crisis was coupled with an uncertain economic environment, which resulted in an average monthly size premium of 1.615% during that year, the paper says.

The paper, “The Size Premium and Macro Volatility Risks: Evidence from US and UK Equity Markets,” is by Sungjun Cho, an assistant professor in finance at the Alliance Manchester Business School of the University of Manchester. The paper will appear in an upcoming issue of the International Journal of Finance and Economics. There will be additional details and comments in an upcoming issue of Business Valuation Update.

When it comes to measuring size premiums or equity risk premiums, no unanimous agreement exists within the appraisal profession as to the appropriate time period. Some practitioners consider market conditions when selecting a start date, while others may believe that all available years should be used, and others still may find a shorter time period to be most reasonable. Flexibility is the key, and, during an upcoming free webinar on March 6, you will see how BVR’s Cost of Capital Professional provides you with the ability to measure your returns over any available time period dating back to 1928.