Size premium puzzle, also known as the size effect, is one of the most studied anomalies in asset pricing literature. It refers to the observation that, on average, smaller firms have higher risk-adjusted returns than larger firms over a long period of time. While many studies have debated the existence of the size effect, the question of why it exists has become a subject of heated debate. Thus, this dissertation aims to examine if previously overlooked factors can, at least partially, explain the size effect. Essay 1 examines if merger and acquisition activity can explain a part of the size effect. I find that merger and acquisition activity explain a part of the size effect. The size effect is found to be stronger during merger waves but is not consistent across industries. Further, the size effect tends to be stronger when acquisition activity is concentrated among smaller firms. Essay 2 investigates if expectational errors explain the higher return of small firms. Several empirical studies show that stocks that investors underestimate yield higher returns. However, I do not find support for the underestimation explanation in explaining the higher returns of small firms. Instead, I find that investors are overly optimistic about the growth of small firms. In essay 3, I examine if the size effect can be explained by perceived risk. Using the implied cost of capital (ICC) as a measure of perceived risk, I find that small firms are perceived to be riskier by the market, and the perceived risk explains the size effect.
| Identifer | oai:union.ndltd.org:unt.edu/info:ark/67531/metadc1986869 |
| Date | 08 1900 |
| Creators | Ghimire, Ashish |
| Contributors | Liu, Yi, Mantecon, Tomas, Nishikawa, Takeshi |
| Publisher | University of North Texas |
| Source Sets | University of North Texas |
| Language | English |
| Detected Language | English |
| Type | Thesis or Dissertation |
| Format | Text |
| Rights | Public, Ghimire, Ashish, Copyright, Copyright is held by the author, unless otherwise noted. All rights Reserved. |
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