The small firm anomaly: US and international evidence.

Abstract

The results of a CAPM test are sensitive to aspects related to the weight one gives to small, low-visibility stocks when constructing the portfolios whose returns serve as left- and right-hand-side variables. It turns out to be the result of a marketwide factor rather than a stock characteristic. To fit the observed returns it suffices to redesign the size and book-to-market factor portfolios into two factor portfolios each, one for the smallest or highest book-to-market stocks relative to other stocks, and one for moderately small or high book-to-market stocks versus larger or growth companies. This alternative 6-factor model does a better job in pricing stocks, both in the US and internationally, than Carhart's 4-factor CAPM with factor portfolios designed following Fama and French (1992, 1993, 1995, 1996a, 1996b, 1998, 2000), Carhart (1997), Jegadeesh and Titman (1993) and Rouwenhorst (1999). The fact that we can resolve mispricing by adding factors rather than characteristics, rules out dataResearch; Impact; Determinants; Firms; Product; Market; Competition; Ownership; Performance; Characteristics; Belgian firms; Control; Companies; Firm performance; International; Portfolio; Variables; Size; Growth; Model; Job; Pricing; Factors; Rules; Data;