Latest paper on the vanishing size effect

BVWireIssue #199-4
April 24, 2019

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

A new academic paper, “Why Has the Size Effect Disappeared?,” explores the disappearance of the small-firm effect after the early 1980s. The authors conclude that the reason is a combination of three empirical facts: (1) the size effect is significantly positive only at the trough stage of a business cycle; (2) the conditional size effects have not gone through any structural changes after 1983; and (3) the duration of the business cycle lengthens so that the trough stage occurs less frequently. “The less frequent occurrences of troughs, due to prolonged business cycle length, are shown to be responsible for the dissolution of the size effect,” the authors say in the paper. The paper is in the May 2019 issue of the Journal of Banking & Finance.

Extra: There appears to be no resolution in sight among BV practitioners and academics as to the existence of the size effect. Two articles in the May 2019 issue of Business Valuation Update illustrate this ongoing debate.

Please let us know if you have any comments about this article or enhancements you would like to see.