Small minus Big

The first question is why there is not a size premium in the Brazilian Market. Studies show for many developed and some emerging countries that smaller firms have higher average returns. This is expected as there is liquidity and information uncertainty for these kinds of firms. Furthermore, Fama and French (1996) suggested that a firm's size is related to its profitability after controlling for other characteristics because small firms earn less on their assets than large ones. There are also behavioral explanations. Durand et al. (2007) use a psychological explanation for the small-firm premium. After controlling for market-persistent variables, they find that the size premium is driven by investor emotional arousal (measured by the turnover ratio) and disproportionate responses to arousing stimuli. According to Hou and Moslowitz (2005), market frictions are the source of the size premium. Moreover Zakamulin (2013) demonstrates that the small-firm premium is predictable both in-sample and out-of-sample from one month to one year using a set of lagged macroeconomic variables. An investment can achieve an abnormal return that is both economically and statistically significant because of this predictability. Finally, Hur et al. (2014) discover that controlling for market beta, the association between size and returns is significant only in down markets. Do these explanations do not hold for Brazil? What could be behind such a behavior? More in the next post.