Some appraisers believe that the size effect has diminished or disappeared since it was first documented in 1981. Other appraisers believe it is alive and well. There have been a number of recent papers questioning the size effect (for example, see our coverage here and here). The newest paper in this same vein is “There Is No Size Effect: Daily Edition” by Cliff Asness (AQR), whose firm has done similar papers (you can see the current paper and links to their other papers if you click here).
Dr. Michael A. Crain (Florida Atlantic University) tells BVWire: “One finding of this paper is to the extent the size effect exists in listed firms (dubious), it is due to illiquidity of smaller firms. This suggests that taking a discount for marketability and a size premium may be double counting illiquidity at least in some degree.”
One of the reasons 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 small-cap stocks over the last 40 years, the size effect is very different than if you go all the way back to the 1920s. On average, smaller listed firms do not outperform larger listed firms since 1980. 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. Dr. Crain is the author of the Cost of Capital Professional platform.
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