Can Overreaction Explain Part of the Size Premium?
International Journal of Revenue Management, 2008, Vol.2, Issue 3.
28 Pages Posted: 11 Dec 2006 Last revised: 20 Aug 2008
Date Written: 2006
Abstract
This paper uncovers several new empirical regularities in the historical returns of small stocks. First, within the sample of firms that have low market capitalizations, stocks with low past profitability ("laggers") bring returns significantly higher than those of stocks with high past profitability ("leaders"). Second, the well-documented size premium (i.e., the risk-adjusted returns to small stocks) is generated largely by small laggers. Moreover, both patterns are particularly pronounced at earnings-announcement dates, suggesting that unexpected earnings growth can explain a portion of the abnormal returns to small stocks.
Keywords: Small-firm effect, Anomalies, Overreaction, Profitability
JEL Classification: G10, G12, G14
Suggested Citation: Suggested Citation
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