The debate continues—what is size premium data really telling you?

BVWireIssue #70-5
July 30, 2008

There has been much discussion regarding the category 10b data found in Morningstar's Stocks, Bonds, Bills and Inflation Valuation Yearbook (SBBI) when determining a size risk premium (or equity risk premium) in the build-up or modified capital asset pricing model.  SBBI uses the market value of equity as the sole measure of company size (as opposed to other size measures). 

In a recent July Q&A, Jim Hitchner, CPA/ABV, ASA (The Financial Valuation Group, Atlanta, GA) highlights some issues that appraisers who use this data should be aware of (read the Q&A here).  Jim notes that “using the market value of equity as a measure of size can be deceiving,” and references Cost of Capital Applications and Examples, Third Edition (Shannon P. Pratt and Roger J. Grabowski, 2008) in which Chapter 13 highlights examples of the disconnect between size as measured by market value of equity and size as measured by a different criteria. The Duff & Phelps Risk Premium Report still stands as an alternative to SBBI for size and equity risk premiums, providing information for 25 size-ranked portfolios using 8 alternative measures of company size (learn more here).

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