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Firm Size and the Information Content of Financial Statements

69 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Abstract

The Capital Asset Pricing Model has been challenged recently by several studies that point to certain anomalies in the capital market related to firm size. Banz [3] reported a nonlinear relation between the aggregate market value of a firm's common stock and the stock's mean return. He found that firms with small market values had large and positive residual returns over a period of at least 40 years. Reinganum [23] found that high earning-price (E/P) stocks had higher returns than low E/P-ratio stocks and that, after controlling for size, the E/P effect largely disappeared. Although they rejected the hypothesis that the anomalies are due to inefficiency in the capital market, the two authors are not able to identify the economic factors that might explain the effect of firm size on the functioning of the capital market.

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References

1981The relationship between return and market value of common stocks 1972Capital Market Equilibrium with Restricted Borrowing 2003The Adjustment of Stock Prices to New Information 1979Risk measurement when shares are subject to infrequent trading 1977Estimating betas from nonsynchronous data 1968The Information Content of Annual Earnings Announcements 1981Misspecification of capital asset pricing 1958The Size Distribution of Business Firms

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