TL;DR
Small companies generally have a higher potential for returns compared to large companies. For instance, stocks of small-cap firms tend to provide higher returns than those of large firms in the long run.
8 min readRolf Banz's 1981 study documented that small-cap firms earned higher returns than large firms. This size premium forms the SMB (Small Minus Big) component of the Fama-French model.
Source of the Size Premium
Small companies are riskier — lower liquidity, higher bankruptcy risk, limited analyst coverage. This extra risk is compensated with higher expected returns. Information asymmetry also makes pricing errors more common in small stocks.
Size Effect on BIST
Stocks outside the BIST 100 receive far less analyst coverage and have lower liquidity. This may strengthen the size premium but also increases transaction costs. Spreads on small stocks can reach 1-3%, significantly eroding the theoretical premium.
Weakening of the Size Premium
Recent evidence suggests the size premium has weakened. Alquist, Israel, and Moskowitz (2018) showed that in the U.S., the size effect largely disappears when controlling for quality. On BIST, liquidity constraints make implementing size factor alone challenging.
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Open Stock Screener →Related articles: What Is Factor Investing?, Momentum Factor, Value Factor, Low Volatility.
Frequently Asked Questions
What is the size factor?
The size factor refers to the tendency of small-cap companies to grow faster and thus provide higher returns compared to large companies.
How is the size premium calculated?
The size premium is calculated by examining the difference in stock returns between small and large companies, typically looking at the changes in annual returns over time.
What are small-cap stocks?
Small-cap stocks are shares of companies with a market capitalization between $300 million and $2 billion, generally possessing high growth potential.
Where can small companies be found on BIST?
Small companies on BIST are typically found among stocks that are outside the BIST 100 and BIST 30 indices.
What are the advantages of small companies?
Small companies often face less competition and have the ability to quickly adapt to market changes, providing them with higher growth potential.
This content does not constitute investment advice. Past performance is not a guarantee of future results. Make your investment decisions based on your own risk profile.
