Michael Crain (University of Manchester - Manchester Business School; Florida Atlantic University; The Financial Valuation Group) recently published his article A Literature Review of the Size Effect on the Social Science Research Network (SSRN).

Crain’s abstract reads:

“The size effect in the finance literature refers to the observation that smaller firms, on average, have higher returns than larger firms. It also describes the contribution that firm size has in explaining stock returns. Discovered by Banz (1981) in testing the Sharpe-Lintner Capital Asset Pricing Model, subsequent research finds the size effect has diminished or disappeared since the 1980s in the U.S. and UK after small-cap funds were launched. Firm size is thought to proxy for underlying risk factors associated with smaller firms. Observed variations in the size effect can be explained by such underlying factors like market liquidity that change over time. Related research finds the size effect is linked to the January effect. The size effect occurs primarily during January has little or no presence in the other 11 months, which confounds empirical research on risk-reward relationships. Research also finds the size effect is concentrated in smaller listed firms, making the effect nonlinear.”