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The Firm Size Effect and the Economic Cycle

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  • Moon K. Kim
  • David A. Burnie

Abstract

Small firms have, on average, lower return on assets and higher leverage than do large firms. Small firms tend to do well in good economic conditions but to perform poorly in the worst economic conditions. We investigate the hypothesis that the small firm effect is manifest in the expansion phase of the economic cycle but not in the contraction phase. The empirical results of our study confirm the hypothesis for 1976–95. We use the alpha, residual, and regression methods in testing the hypothesis.

Suggested Citation

  • Moon K. Kim & David A. Burnie, 2002. "The Firm Size Effect and the Economic Cycle," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 25(1), pages 111-124, March.
    • Handle: RePEc:bla:jfnres:v:25:y:2002:i:1:p:111-124
    DOI: 10.1111/1475-6803.00007
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    Cited by:

    1. George Karathanasis & Konstantinos Kassimatis & Spyros Spyrou, 2010. "Size and momentum in European equity markets: empirical findings from varying beta Capital Asset Pricing Model," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 50(1), pages 143-169, March.
    2. Robert Rutledge & Zhaohui Zhang & Khondkar Karim, 2008. "Is There a Size Effect in the Pricing of Stocks in the Chinese Stock Markets?: The Case of Bull Versus Bear Markets," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 15(2), pages 117-133, June.
    3. João Cruz & João Nicolau & Paulo M. M. Rodrigues, 2021. "Structural Changes in the Duration of Bull Markets and Business Cycle Dynamics," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 28(3), pages 333-352, September.
    4. Jae-woongYoo & Min-Kyu Lee & Wan Soo Lee, 2016. "Asymmetrical corporate responses to economic information: Applying the firm size effect," Journal of Administrative and Business Studies, Professor Dr. Usman Raja, vol. 2(1), pages 25-37.
    5. Ronghua Xu & Yiran Liu & Meng Liu & Chengang Ye, 2023. "Sustainability of Shipping Logistics: A Warning Model," Sustainability, MDPI, vol. 15(14), pages 1-15, July.
    6. Tarek Eldomiaty & Nourhan Eid & Farida Taman & Mohamed Rashwan, 2023. "An Assessment of the Benefits of Optimizing Working Capital and Profitability: Perspectives from DJIA30 and NASDAQ100," JRFM, MDPI, vol. 16(5), pages 1-19, May.
    7. Eduardo Sandoval, 2015. "Small Vs Large Caps. Evidence From Developed And Emerging Stock Markets During Periods With And Without Financial Crisis, Small Vs Large Caps. Evidencia De Mercados Accionarios Desarrollados Y Emergen," Revista Internacional Administracion & Finanzas, The Institute for Business and Finance Research, vol. 8(4), pages 27-44.
    8. David Burnie & Adri De Ridder, 2010. "Far tail or extreme day returns, mutual fund cash flows and investment behaviour," Applied Financial Economics, Taylor & Francis Journals, vol. 20(16), pages 1241-1256.
    9. Greg Filbeck & Xin Zhao & Ryan Knoll, 2017. "An analysis of working capital efficiency and shareholder return," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 265-288, January.
    10. Bing Xiao, 2023. "The Size Effect and the Value Effect in the American Stock Market," Post-Print hal-04194510, HAL.
    11. Bing Xiao & Philippe Maillebuau, 2020. "The Seasonal Effect On The Chinese Gold Market Using An Empirical Analysis Of The Shanghai Gold Exchange," Post-Print hal-02905216, HAL.
    12. Surendranath Jory & Thanh Ngo & Jurica Susnjara, 2020. "Stock mergers and acquirers’ subsequent stock price crash risk," Review of Quantitative Finance and Accounting, Springer, vol. 54(1), pages 359-387, January.
    13. Chen, Tsung-Cheng & Chien, Chin-Chen, 2011. "Size effect in January and cultural influences in an emerging stock market: The perspective of behavioral finance," Pacific-Basin Finance Journal, Elsevier, vol. 19(2), pages 208-229, April.
    14. Sangram Keshari Jena & Aviral Kumar Tiwari & Ashutosh Dash & Emmanuel Joel Aikins Abakah, 2021. "Volatility Spillover Dynamics between Large-, Mid-, and Small-Cap Stocks in the Time-Frequency Domain: Implications for Portfolio Management," JRFM, MDPI, vol. 14(11), pages 1-22, November.
    15. Li, Mingsheng & Zhao, Xin, 2016. "Neighborhood effect on stock price comovement," The North American Journal of Economics and Finance, Elsevier, vol. 35(C), pages 1-22.
    16. Switzer, Lorne N., 2010. "The behaviour of small cap vs. large cap stocks in recessions and recoveries: Empirical evidence for the United States and Canada," The North American Journal of Economics and Finance, Elsevier, vol. 21(3), pages 332-346, December.
    17. Semenov, Andrei, 2015. "The small-cap effect in the predictability of individual stock returns," International Review of Economics & Finance, Elsevier, vol. 38(C), pages 178-197.
    18. Tienyu Hwang & Simon Gao & Heather Owen, 2014. "Markowitz efficiency and size effect: evidence from the UK stock market," Review of Quantitative Finance and Accounting, Springer, vol. 43(4), pages 721-750, November.
    19. Hock, Thorsten, 2008. "Tactical size rotation in Switzerland," W.E.P. - Würzburg Economic Papers 77, University of Würzburg, Department of Economics.
    20. Thadeu Gasparetto & Angel Barajas, 2022. "Wage Dispersion and Team Performance: The Moderation Role of Club Size," Journal of Sports Economics, , vol. 23(5), pages 548-566, June.
    21. Thorsten Hock, 2010. "Tactical Size Rotation in Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 146(III), pages 553-576, September.
    22. Pernilla Linden & Zoltan Matolcsy, 2004. "Corporate Governance Scoring Systems: What Do They Tell Us?," Australian Accounting Review, CPA Australia, vol. 14(32), pages 9-16, March.
    23. Wang, Lei & Li, Shouwei & Wang, Jining & Meng, Yi, 2020. "Real estate bubbles in a bank-real estate loan network model integrating economic cycle and macro-prudential stress testing," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 542(C).
    24. Zhang, Jianhong & Jiang, Jiangang & Noorderhaven, Niels, 2019. "Is certification an effective legitimacy strategy for foreign firms in emerging markets?," International Business Review, Elsevier, vol. 28(2), pages 252-267.

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